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CONTRACTS II OUTLINE

Spring 2006—Professor Stone


Christy L. Young

CHAPTER 3: INTENTION, INTERPRETATION, IMPLICATION AND RELATED MYSTERIES

INTENT TO CONTRACT
Restatement § 17
The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.

Subjective v. Objective Intent


Subjective intent: Look at subjective intentions/state of mind of the parties. There has to be some manifestation of assent. Actual
assent to the agreement on the part of both parties is necessary, and w/o it there can be no contract b/c no meeting of the minds.
Objective intent: What a reasonably prudent or dispassionate third party would regard as intent (outward intent). Looks to external
appearance of parties’ intentions as manifested by their actions.
 The outward intent is what will control in the objective standard. If a person subjectively boasts and does not intend to
contract, but jokingly does so, and the other person believes there is a contract, then there is a contract.
 The objective theory of intent is well-accepted today.

List of factors to help determine whether the parties intended their agreement to be binding:
 Whether the contract is of a class which are usually found in writing
 Whether it is of such nature as to need a formal writing
 Whether it has few or many details
 Whether the amount involved is large or small
 Whether it is a common or unusual contract
 Whether the negotiations themselves indicate that a written draft is contemplated as the final conclusion to negotiations.

Restatement § 19
(1) A manifestation of assent may be made “wholly or partly by written or spoken words or by other acts or by a failure to act.
(2) The conduct of a party is not effective as manifestation of his assent unless he intends to engage in the conduct and knows or
has reason to know that the other party may infer from his conduct that he assents.
(3) The conduct of a party may manifest assent even though he does not in fact assent.

Restatement § 21
Neither real nor apparent intention that a promise be legally binding is essential to the formation of a contract, but a manifestation of
intention that a promise shall not affect legal relations may prevent the formation of a contract.

Homan v. Earle. Defendant, an elder at his church, visited plaintiff frequently and made her believe they were engaged. Visits were
cordial and affectionate in character and at one of them defendant informed the plaintiff that he intended to marry when the year was
up. Defendant requested of plaintiff a note stating they were just friends, to relieve himself from an obligation he felt that he had
incurred. Defendant later married another woman. Verdict for Plaintiff. The defendant was marriageable and openly avowed his
intention to marry at a certain time, and although he did not in words ask the plaintiff, he said and did everything else indicating such a
purpose, and received her assent, and was warned by her that his continuance would be regarded as such. The defendant testified he
did not intend to marry plaintiff. This may be so; yet if his acts and language were such as to induce her to believe that there was an
engagement, and she acted upon that belief, and he knew that she so regarded them, and so acted and still continued, he cannot deny
the engagement existed. She has a right to enforce the obligation which he professed to incur.
 Intention should be determined from TOTALITY of conduct and not just spoken words.
 If you appear serious, and a third party would take you seriously, then you are bound to your contract.
 Shows that actions can be used to determine intent.
 You cannot say one thing and do another and expect the words to negate the conduct.

Embry v. Hargadine. Employee relied on the ambiguous words of his employer that his contract was renewed. The court held that
the boss must have answered as he did for the purpose of assuring employee that any apprehension was needless, that employee’s
services would be retained. The court found the answer was unambiguous, and we rule that if the conversation was according to
employee’s version, and he understood he was employed, it constituted in law a valid contract of re-employment, and the court erred
in making the formation of a contract depend on a finding that both parties intended to make one.
 Court used the objective intent approach. It doesn’t matter that the subjective intent of the employer was not to rehire the
employee because a reasonably prudent person would think that the contract was renewed.
 Lesson is to be clear in what you are saying. Don’t give someone the opportunity to make what you said into the contract.
 Mutual consent/assent is generally considered objective instead of subjective.
 Restatement § 17—Do we have mutual assent?
Look at Farnsworth at Incapacity.

Tolmie v. UPS. Tolmie considered offer of promotion to a management position but position was not governed by agreement allowing
dismissal only for good cause. Manager re-assured him it was harder to fire management than other employees. Tolmie accepted
promotion, relying upon the assurance, and was thereafter terminated for reasons that would not constitute ‘good cause.’ Tolmie was
an at-will employee who could be fired at any time. The law seeks to determine whether the alleged promise is ‘clear enough that an
employee would reasonably believe that an offer has been made. Tolmie walked out of his supervisor’s office with a vague and
informal assurance, not an offer.
 Court said a reasonably prudent person would NOT have believed that a new contract was formed because the bosses words
were ambiguous.

MUTUAL AMBIGUITY (Restatement 20)


Hotchkiss v. National City Bank of New York. “If, however, it were proved by twenty bishops that either party, when he used the
words, intended something else than the usual meaning which the law imposes upon them, he would still be held, unless there were
some mutual mistake, or something else of the sort. Of course, if it appear by other words, or acts, of the parties, that they attribute a
peculiar meaning to such words as they use in the contract, that meaning will prevail, but only by virtue of the other words, and not
because of their unexpressed intent.”

Restatement § 20: Effect of Misunderstanding


(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their
manifestations and
(a) neither party knows or has reason to know the meaning attached by the other; or
(b) each party knows or each party has reason to know the meaning attached by the other.
(2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if
(a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached
by the first party; or
(b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know
the meaning attached by the first party.

Konic International v. Spokane Computer Services, Inc. The magistrate entered judgment for Spokane Computer, concluding there
was no contract between the parties because of lack of apparent authority of an employee of Spokane Computer to purchase the device
from Konic. David Young, an employee of Spokane Computer, was instructed to investigate the possibility of purchasing a surge
protector. Young talked with one of Konic’s salesmen and inquired as to the price of the item. The salesman responded, “fifty-six
twenty.” The salesman meant $5,620. Young thought $56.20. Young ordered the equipment. Both parties attributed different
meanings to the same term, “fifty-six twenty.” Thus, there was no meeting of the minds of the parties. Because the “fifty-six twenty”
designation was a material term expressed in an ambiguous form to which two meanings were obviously applied, the court concludes
that no contract between the parties was ever formed. Any agreement of the parties was merely an illusion.

Peerless. There was latent ambiguity. Each party was talking about a different ship called Peerless. No contract created because
there was no meeting of the minds. The court ruled that because each party had a different ship in mind at the time of the contract,
there was in fact no binding contract.

UCC 2-302: Unconscionable Contract or Clause


(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was
made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable
clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.
(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be
afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in
making the determination.

Economic view: Peerless and Konic are the opposite of the economic view. Each party should look out for his own self-interest and
make sure that he is precise. The party with the most to lose should bear the burden of being precise. The buyer should internalize the
cost because he has the most to lose. He’ll have to pay $5620 for something he thought was $56.20. It’s his own fault because he
should have been clear.

London County Council v. Henry Boot & Sons. Contract contained “escalator clause” under which the London County Council
would increase its payments to the plaintiffs, building contractors, in the event of increases in the “rates of wages” paid by them. The
London County Council made it clear that they did not regard holiday credits as coming within the escalator clause; but the builders’
association took a different view. Neither side inserted any words in the contract so as to clear up the difference between them. In
case of difference as to the meaning of those terms, it was for the court to determine it. It does not matter what the parties, in their
inmost states of mind, thought the terms meant. The contract is binding according to its terms—as interpreted by the court.
Restatement § 71
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by
the promise in exchange for that promise.
(3) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.

Restatement § 231
Performances are to be exchanged under an exchange of promises if each promise is at least part of the consideration for the other and
the performance of each promise is to be exchanged at least in party for the performance of the other.

INTERPRETATION (Restatement 201-203)


Frigaliment Importing Co. v. BNS International Sales Corp. Plaintiff says “chicken” means a young chicken, suitable for broiling
and frying. Defendant says “chicken” means “any old chicken,” including “stewing chicken” and “fowl.” The court doesn’t go with
mutual ambiguity so no contract like Konic and Peerless. Court follows the economic approach—Plaintiff has the burden to prove
that parties mean “young chicken” because he has the most incentive to be clear. Instead of saying no contract, court uses four part
test to clear up ambiguity and the burden is on the party with the most to lose (the buyer). Buyer claims trade usage is that chicken
means “young chicken.” The seller is new to the industry so he was not held to the trade usage. Buyer doesn’t prove that the parties
meant “young chicken” so the seller wins. Chicken means any chicken.
 There is intent and a meeting of the minds here.
 Whenever one party wishes to establish a narrower meaning of a word, he bears the burden of the proof. The ordinary
meaning of the terms will be used unless the plaintiff specifies to the contrary.
 If we want to define INTENT we focus on (1) what the terms of the contract say. If they are clear terms, we go no further.
Chicken isn’t a clear term here. So, (2) what is the generally accepted meaning of the word? (3) If the parties wish to assign
or communicate a special meaning to the words—then the party with the most economic interest to do so, should take on the
burden of proof to specify in the contract. (4) Trade usage or prior course of dealing? That could help to set the terms, if
applicable, if there is a history of trading.

Hypo: Jodi won a contest in early May to see who could sell the most beer in April. She was told the prize was a new Toyota.
Blindfolded, she is led to the parking lot. She found she was the winner of a Toy Yoda. She quits restaurant and files lawsuit. Rest.
20. The Peerless case. There was no meeting of the minds because each party had a different interpretation.

US Naval Institute v. Charter Communications. Naval Institute published book. Granted defendant a license to publish and the
contract stipulated that publication date was no sooner than October 1985. Defendant relied on common industry practice and began
filling orders and shipping books before October 1985. U.S. Naval says they didn’t know about the trade usage and contract is
breached. Court says trade usage prevails. If you are in the industry then you should know the customs of the trade. In business the
common industry custom will usually prevail. If you don’t know the industry, then get out or learn it. (opposite trade usage view than
Frigalmente chicken case)

FOUR PART TEST


When a dispute as to the meaning of terms look to:
(1) Terms of the agreement
 Expressed clear language of the parties in the contract govern if they are in the contract.
(2) General Meaning
 If not expressed in the contract, the generally accepted meaning using an objective approach will be used.
 What would an ordinary reasonable prudent person believe that the term meant?
(3) Special Meaning
 If not expressed in the contract and one party would like to use a meaning other than the general meaning
the party must prove with evidence that the parties intended for the special meaning to be used. If the party
does not prove that they intended for the special meaning to be used then the general meaning will govern.
(4) Industry Custom or Trade Usage/Course of conduct

Pgs. 398-415
Texaco, Inc. v. Pennzoil Co. When do we truly have an intent to contract? Pennzoil and Gordon Getty (Getty Oil) set out a
“Memorandum of Agreement” and drafted it to reflect the terms that had been reached in conversations. The original offer was not
acceptable to the Getty Oil Board, but new terms were agreed upon. Getty Oil and Pennzoil both created press releases to describe the
transaction, which stated, “the transaction is subject to execution of a definitive merger agreement, approval by the stockholders of
Getty Oil, and various filing and waiting period requirements.” Meanwhile, Getty Oil’s investment banker began calling other
companies, seeking a higher bid than Pennzoil’s for Getty’s Oil shares. Texaco made a higher bid and the Getty Oil Board voted to
withdraw its previous counter-proposal to Pennzoil and unanimously accepted Texaco’s offer. Issue: Whether the evidence supports
the jury’s finding that there was a binding contract between the Getty entities and Pennzoil, and that Texaco knowingly induced a
breach of contract. Texaco contends there was insufficient evidence to support the jury’s finding that the Getty entities intended to
bind themselves to an agreement with Pennzoil. Pennzoil responds that the question of the parties intent is a fact question, and the
jury was free to decide the matter. The question of the parties intent to be bound, the court determined, was a question of fact to be
decided by the jury. There is little question that the transaction by which Getty Oil was to be taken private involved an extremely
large amount of money. It is unlikely that parties to such a transaction would not have expected a detailed, written document,
specifically setting out the parties’ obligations and the exact mechanics of the transaction. Holding: Although the magnitude of the
transaction here was such that normally a signed writing would be expected, there was sufficient evidence to support an inference by
the jury that the expectation was satisfied here initially by the Memorandum of Agreement, signed by a majority of shareholders of
Getty Oil and approved by the board at a higher price, and by the transaction agreement in progress that had been intended to
memorialize the agreement previously reached.
 Several factors have been articulated to help determine whether the parties intended to be bound only by a formal, signed
writing:
(1) whether a party expressly reserved the right to be bound only when a written agreement is signed;
(2) whether there was any partial performance by one party that he party disclaiming the contract accepted;
(3) whether all essential terms of the alleged contract had been agreed upon; and
(4) whether the complexity or magnitude of the transaction was such that a formal, executed writing would
normally be expected.
 Argue memo that was signed was a valid contract—it was an agreement on most key terms, the press release used definite
words, said it was a “done deal.”
 Argue memo was NOT a contract—memo was only part of Preliminary Negotiations (Rest. 26)

Easterbrook v. Ball-Co Mfg. Intent in contract law is objective rather than subjective—citing to Interway, stating that as a matter of
law parties who make their pact “subject to” a later definitive agreement have manifested an objective intent not to be bound. If intent
were wholly subjective, as wholly a matter of the parties’ states of mind, every contract case would have to be decided by jury trial,
and no one could know the effect of a commercial transaction until years after the documents were inked.

City Stores Co. v. Ammerman. Owner of Lansburgh’s Dept. Store desired to obtain a large store in the Tyson’s Corner Shopping
Center project. Defendants offered owner opportunity to become tenant if he wrote a letter to the county zoning authorities. Tyson’s
give the spot to Sears and owner sues for specific performance. Issue: Whether a court of equity will grant specific performance of a
contract which has left such substantial terms open for future negotiation. The Court did grant specific performance the rental terms
and standards of construction are set out in the leases that were already made between other dept stores for their rental spaces.

Two types of ambiguity can usefully be distinguished:


 Intrinsic: (internal) Present when the agreement itself is unclear.
 Extrinsic: (external) Present when the agreement itself it perfectly lucid and complete BUT anyone familiar with the real-
world context of the agreement would wonder what it meant with reference to the particular question arisen. This is what it
means to say that extrinsic evidence is admissible to demonstrate an ambiguity. There is no ambiguity on the surface of
the document; the ambiguity appears only when extrinsic evidence is considered.

CHAPTER 4: OFFER AND ACCEPTANCE


OFFER: An “offer” is a manifestation to another of assent to enter into a contract if the other manifests assent in return by some
action, either a promise or performance.
ACCEPTANCE: An “acceptance” is the action by the offeree that creates a contract and makes the offeror’s promise enforceable.

Elements of an Offer
1. Intent to Make an Offer (must have “words of offer” and not just words of “preliminary negotiations”) Rest. 24, 26
2. Certainty of Terms, Rest. 33, 34
3. Communication, Rest. 50, 52
Hypo: If X makes an offer to sell something to Y, and Z says, “I accept.” There is no contract and no acceptance. Restatement 52.

Second definition of offer: A promise to do or refrain from doing a specified thing in the future. An offeror promises to do something
and expects something in return.

Nebraska Seed Co. v. Harsh. Held: No contract. The letter does not use the words “offer” or “sell.” The letter shows that it was not
intended as a final proposition, but as a request for bids. The language used is general, and such as may be used in an advertisement,
or circular addressed generally to those engaged in the seed business, and is not a binding offer. Is there intent, by the farmer, to
contract?
 Argue Yes—we have most of the terms and Rest. 204 court can supply gap filling with mechanics of delivery time.
 In no contract, only preliminary negotiations (Rest. 26). A drafter who wants to ensure there is a binding contract should use
the words, “I offer to sell…”
 Each case, go through the elements of an offer to see which, if any, element is not present.
Moulton v. Kershaw. Held: No contract. Notice reads, “In consequence of a rupture in the salt trade, we are authorized to offer…”
Plaintiff sends note, “You may ship me 2,000 barrels of Michigan fine salt, as offered in your letter.” Defendant declined to ship the
salt and withdrew offer. The word “sell” is not used. They use general language proper to be addressed generally to those who were
interested in the salt trade. It is clearly in the nature of an advertisement or business circular, to attract the attention of those interested
in that business to the fact that good bargains in salt could be had by applying to them, and not as an offer by which they were to be
bound. Was there any offer to accept?
 Rule: To constitute intent to make an offer there must be words of intent
 Rule: Rest. 33. Terms must be definite and certain.
 If you place an order, orders are usually offers.

Fairmount Glass Works v. Grunden-Martin Wooden-Ware Co. Were the terms ever specific enough? (Battle of the forms—each firm
wants to use their own form) Letter read, “Please advise us the lowest price you can make us on our order for ten car loads of…”
Defendant replied quoting lowest price for “immediate acceptance, and shipment no later than May 15, 1895.” Plaintiff sent a letter of
acceptance and defendant could not book the order, “Output all sold.” Each case turns largely on the language used. Plaintiff’s letter,
which began the transaction, did not ask for a quotation of prices. From this, defendant could not fail to understand that plaintiff
wanted to know at what price it would sell it ten car loads of these jars. We can hardly understand what was meant by the words, “for
immediate acceptance,” unless the latter was intended as a proposition to sell at these prices if accepted immediately. Plaintiff’s letter
was plainly an inquiry for the price and terms on which defendant would sell it the goods, and defendant’s answer to it was not a
quotation of prices, but a definite order to sell on the terms indicated, and could not be withdrawn after the terms were accepted.
 Fairmount Rule: Generally, we only look at words and conduct of offeror, but Fairmount says look at all correspondence.
This is troublesome because generally the offeror is master of the offer and we don’t look at the offeree’s conduct.
 All the material terms are present within the correspondence as a whole. No single letter would be enough to constitute a
contract but taken together they do provide sufficient terms.
 Rest. 50, 52 The offeror is no longer completely the master of his offer. The judge violates this here.
 Fairmount Two Part Rule:
(1) Offer must be reasonably definite/certain.
(2) Intent may be found from correspondence as a whole.
 Aim of the court is to arrive at the intention of the parties.
 Once an offer is accepted you can’t revoke. You have pregnancy of contract—the baby is coming.
 Argue the buyer may have mechanically supplied terms initially but the offeror has adopted and used the terms as part of the
negotiation process. We’ve called the seller the offeror, but could we argue the buyer is the offeror?
 A breach because there is no mutual discharge of the agreement.

Lefkowitz case. Found ad as an offer. Is this really an offer? Are all ads offers? The status quo is that ads and business circulars are
not offers, but invitations (Rest. 26) or invitations to make an offer or unilateral offers that may be withdrawn with notice (Craft/Kraft
case). This would expose the ad-maker to infinite numbers of people coming to take them up on their offer—this is why courts tend
not to see ads as offers. It would be inefficient to bring all these people to trial in a world of scarce resources.
 What is the intent? Some performance was promised in positive terms in return for something requested. You need
language of promise in the ad. The more detailed and forceful the ad, the closer we’re moving toward an offer.
 If we found ads were generally offers (which we don’t, but if we did) the ads would very vague so that a business would
not be held to a high standard.

Izadi v. Machado. Designed to stop misleading ads. Look at what legislatures have done for ads. Under common law, ads were
generally not offers. Why? It is economically inefficient to hold seller responsible. There is a lack of certainty of terms of quantity
(seller would be responsible to meet all needs over that which they are able), Rest. 33, and lack of intent, Rest. 24. No intent to
communicate to a person, Rest. 52 (offeror being master of his offer). Ads governed by statutory law, making them offers—will be
held to be offers.

Evolution of the Contract:


(1) Strict common law cases—Ads are NOT offers (Nebraska Seed Co, Moulton)
(2) Looks at offeree and offeror to determine intent—cases that look at communication as a whole. (Lefkowitz, Fairmount Glass case)
(3) Court and administrative areas step in with deceptive trade practices act. Lefkowitz, Izadi cases. A third party, the government,
controls the contract.

One should say in the ad, “this is not an offer.” Consumer protection statutes are supposed to protect consumers but what actually
happens. You may get some ads that are more clear or some sellers say ad is not an offer or put enough complexity into the ad such
that courts will say there is no offer. This gives the consumer more uncertainty—such that they don’t know how the courts will
decide. There will also be fewer ads—the information cost to the consumer is raised. Consumers get less information. Query: do the
statutes help or hinder here? Is there some alternative, more efficient method than gov’t regulation? What can market regulation
provide here? Consider the ex: of rainchecks sponsored by a company that is out of certain goods. If not honored, what happens? The
consumers change their buying habits and go elsewhere. Whether we use rainchecks or a store simply not honoring its ads, there will
be immediate market discipline in both cases. What incentive for the seller? Honor to uphold the ads. Shopping online can change
our buying patterns—and be done more cheaply and in less time. If the market is imperfect, won’t the governmental regulation we
seek be even more imperfect? Posner argues FTC is grossly inefficient and should be abolished.

Death of Offers
(1) Revocation: withdrawal of the offer, offeror kills his own offer (Rest. 42, 43). This can also be done with lapse of time (Rest.
41).
(2) Rejection: offeree kills by refusing the offer (Rest. 38).
(3) Counteroffer: offeree kills by substituting a new offer with new terms (Rest. 39). Then, offeree becomes the new offeror in
the counteroffer.

Dickinson v. Dodds. Landmark case. Simple rule for a complex world. Dickinson wants specific performance of the contract. This
is a Revocation case. What Dodds’ offer to Dickinson revoked when Dickinson learned of Dodd’s dealings with a third party? If the
contract was revoked, then there was no offer, and nothing to accept. We don’t even have to worry about acceptance. Rest. 43. No
contract, there was a revocation by Dodds. The first issue: A matter of whether the seller has agreed to sell the property to a third
party. Secondly: the buyer learning of the sale. An offer is revoked upon a party’s learning of a sale.
 Argue there was revocation: Communication of revocation. There is no property left to sell to plaintiff here (Rest.
48). Death of property. When one sells to a third party, what should a normal, reasonably prudent person think?
Another person cannot expect to receive the same scarce resource. (Rest. 43)
 Argue offer was not effectively revoked: Seller takes the risk as to indirect revocation. He promised to leave offer
open until Friday. An ordinarily reasonable prudent person would believe the offer was left open until then.
Deceptive trade practices statutes were designed to protect against this—if inpersonal ads are protected, shouldn’t
personal offerees be protected? Can argue no consideration, a naked promise.
 Great uncertainty. Who should bear the risk—who is trying to change the status quo? Dodds.
 Buyer didn’t hear from the seller himself but heard from an outside agent, Berry. If the offeror Dodds is to be
master of his offer, shouldn’t he have needed to convey the revocation to Dickinson? It depends on whether the
information is reliable under (Rest. 43)—if town drunk had conveyed the message, would that have been “reliable?”
Argue yes/no on reliability.
 UCC Option (Rest. 45 and 87) or Firm offer 2-205—where offer can’t be revoked until a certain time period is up.
However, defendant gave a naked promise and not a firm offer, but if you were plaintiff’s counsel what could you
plead here? Reliance doctrine (Rest. 90), justifiable reliance.
 Could you also argue Dickinson accepted the offer? The notice to Dodds mother-in-law could amount to an
acceptance. Is she a proper agent? Argue yes/no. Does she have authority to receive acceptance. Rest. 68.

Revocation (Rest. §43)


A) TWO PART TEST for Revocation of a Properly Communicated Offer:
1) Offeror takes definite action inconsistent with an intention to enter into the proposed contract AND
2) Offeree acquires reliable information to that effect.
 Stats are split on whether the offeree has to have actual knowledge of the revocation or whether the fact that the
offeree “should have known” of the revocation is sufficient.
 Argue both theories:
o Actual knowledge approach
o Should have known approach (AKA constructive knowledge approach)

Rest. § 43 Indirect Communication of Revocation


An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter
into the proposed contract AND the offeree acquires reliable information to that effect.

The Law of Offer and Acceptance


A. Terminology
The person making the offer is referred to as the offeror and the person to whom the offer is addressed is the offeree. If the
offeror withdraws his offer before it is accepted (as in Dickinson v. Dodds), he is said to revoke his offer. In contrast, if the
offeree refuses to enter into the deal he has rejected the offer. A counteroffer is a statement by the offeree suggesting substitute
terms.

B. Duration Of An Offer
(1) Rejection
The “black letter” rule is that an unequivocal rejection terminates the power of acceptance. The rule that a rejection normally
terminates an offer may also protect the offeree, who may thereafter reopen negotiations with the offeror without concern that his
or her renewed expression of interest might be viewed as an acceptance of the original offer.
If an offer has been rejected with the effect of terminating the power of acceptance, and the offeror then states that he or she
will disregard the rejection, the offeror has made a new offer on the same terms.
(2) Counteroffers and Conditional Acceptances
The “black letter” rule is that a counteroffer is a rejection of the offer, and thus has the same effect as a rejection on the
duration of the offer. There is an important difference between an outright rejection and a counteroffer: the first is a statement of
lack of interest on the part of the offeree while the second indicates an interest in the transaction but on different terms. A
counteroffer is itself an offer that is capable of being accepted by the original offeror; it therefore carries on negotiations rather
than breaking them off.
A communication that is intended to be an acceptance but adds qualifications or conditions is a counteroffer and a rejection
rather than an acceptance. It doesn’t matter whether the qualification or condition changes the substantive terms of the proposal
or simply imposes additional procedural requirements; in either event it is a counteroffer if it imposes new terms.
On the other hand, many communications that appear at first blush to impose new conditions may be acceptances rather than
counteroffers; it depends on whether a condition adds a new term.

Hypo: A offers to sell specified hardware to B on stated terms. B replies: “I accept your offer; ship in accordance with your
statement. Please send me also one hand saw at your list price.” The request for the saw is a separate offer, not a counter-offer.

An acceptance, to be effective, must be unequivocal; the offeror is entitled to know unambiguously whether or not his offer
has been accepted. A “wishy-washy,” ambiguous, or verbose communication that does not address the offeree’s intention
squarely is unlikely to be an effective acceptance.

UCC 2-207 Counteroffers

(3) Lapse of Time


As illustrated by Dickinson v. Dodds, an offer may itself establish the period during which it is open. Where the offer does
not specify a time period for its existence, the “black letter” rule is that the offer expires at the end of a “reasonable time.” Rest.
41. What is reasonable depends on the circumstances: the nature of the proposed contract, the communications of the parties as
to their goals or purposes, their prior course of dealing, if any, and applicable usages of trade. The offeror, however, may extend
the period by indicating that the time taken was acceptable to him.

(a) Direct negotiations. Where the parties bargain face to face or through instantaneous electronic means such as the
telephone or electronic mail, a reasonable time usually does not extend beyond the termination of the discussion or
communication. A longer period is implied if the parties agree to use a slower means of communication.

(b) Speculative transactions. Where contracts involve the purchase or sale of commodities, securities, or goods that fluctuate
rapidly in price, a reasonable time is normally very short, particularly when the contemplated transaction involves a fixed price.
Where an offeree in fact uses the time made available for communication to take advantage of price movements favorable to
him, there may be a lack of good faith that permits the offeror to refuse to complete the transaction. UCC 1-105, 2-103(1)(b).

(4) Death or Incapacity of Offeror


The “black letter” rule is that the offeree’s power of acceptance is terminated upon the death or incapacity of the offeror.
Rest. 48. This rule, originally based on the subjective “meeting of the minds” theory, has been criticized on the ground that it
creates unnecessary potential injustice to offerees who are unaware of the death or incapacity. On the other hand, this black letter
rule simplifies the problems often faced by personal representatives who may have great difficulty locating and revoking
outstanding offers.

C. To Whom An Offer Is Addressed


The “black letter” rule is that an offeror may exclusively determine the person or persons in whom a power of acceptance is
created.

D. What Constitutes A Revocation


A revocation must be a clear manifestation of unwillingness to enter into the proposed bargain. Magic words are NOT
required; for example an unequivocal statement that property previously offered for sale to the offeree has been disposed of to a
third person is an effective revocation of the offer to sell the property to the offeree.

E. Indirect Revocation
Offers, acceptances, and other related communications generally must be communicated to the person to be effective. An
unexpressed revocation is universally rejected. Dickinson v. Dodds involved a different problem: Dickinson learned through
Berry that Dodds had apparently changed his mind about selling the property to him. It was an indirect revocation.

Restatement 42
Where an offer is for he sale of an interest in land or in other things, if the offeror, after making the offer, sells or contracts to sell
the interest to another person, and the offeree acquires reliable information of that fact, before he has exercised his power of
creating a contract by acceptance of the offer, the offer is revoked.
Restatement 43
An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with an intention to enter into
the proposed contract and the offeree acquires reliable information to that effect.

F. Communication to Third Persons


In Dickinson v. Dodds, Dickinson delivered an acceptance to Mrs. Burgess, Mr. Dodds’ mother-in-law, who promptly forgot
to give it to him. Should such a communication be given legal effect? Rest. 68 states that a written revocation, rejection or
acceptance is received when it “comes into the possession of the person addressed, or of some person authorized by him to
receive it for him, or when it is deposited in some place which he has authorized as the place for this or similar communications to
be deposited for him.”

G. Manner Of Signifying Acceptance


The “black letter” rule is that an acceptance must comply with the precise requirements of the offer, since the offeror is
“master of his offer” and can specify what actions constitute an effective acceptance. In the real world, an offeror is probably
little concerned with the formal aspects of an acceptance. Rest. 60. A formal requirement of an acceptance being in particular
form may be ignored by the offeror; the result is an acceptance by conduct of the parties despite the restrictive language of the
offer. In many situations, actions speak louder than words. Rest. 22.

H. When Is A Communication Effective? “The Mailbox Rule” And Other Mysteries


The “black letter” rule is that in the absence of an express specification by the offeror, an acceptance is effective when it is
put into the mail while all other communications—offers, counteroffers, revocations, etc—are effective only when received.
When an offeror sends his offer by mail, he makes the post office his agent to receive and carry the acceptance. The receipt
by the post office is therefore receipt by the offeror himself. After mailing the acceptance the offeree is likely to change position
in reliance on the existence of a contract since he or she will assume the offeror still desires the transaction: the mail box rule
protects this reliance.
A Rejection Followed by the Mailing of an Acceptance. Unlike an acceptance, a rejection is effective only when it is
received. If the offeree first mails a rejection and then mails an acceptance, the Restatement abandons the mail box rule and
provides that a contract exists only if the offeror receives the acceptance before he receives the rejection.
(1) Specification by the Offeror
The mailbox rule may be varied or rejected by the offeror’s specification of the manner of acceptance. The offeror is the
“master of his offer” and may specify how and when assent must be communicated.
(2) Use of an Improper Medium of Transmission
The offeree must adopt at least as rapid and reliable a means of communication as that chosen by the offeror. Rest. 67 takes
the position that a communication sent by an improper medium of transmission is nevertheless effective on dispatch if it is
received no later than the time transmission by a proper medium would have been received.
(3) Messages That are not “Properly Dispatched”
Rest. 66 states that the mailbox rule is not applicable to acceptances that are not properly addressed, on which proper postage
is not affixed, and so forth.

J. Crossing Communications
The law of offer and acceptance is interactive and one can argue that neither offer was intended to manifest assent to the offer
of the other. As a result no contract is formed.

Hypo: A sends B an offer through the mail to sell A’s horse for $500. While this offer is in the mail, B in ignorance thereof, mails
to A and offer to pay $500 for he horse. There is no contract.

A more realistic example arises when negotiations are underway and the parties exchange crossing communications which,
taken together, indicate agreement on all terms.

Hypo: A offers B proposal for $50,000 by letter on the 10th. B sends return letter to accept (on 11th) but arrives at A’s place on
13th. But back on 12th B telephones A and says, I reject. Decide?
 Argue Yes: Under mailbox rule, it was dispatched and effective on the 11th, the rest is mere surplus-age. He had already
accepted, so he can’t reject. What is efficient about this rule? It allows us to use a principle, agent, and third-party.
Each party has low information costs. Offeror does not have to follow this rule, if he doesn’t like it—he just has to put
the terms in the offer. This is just a default rule. Let’s maximize our freedom by Cosean contracting. It closes the deal
more quickly. Performance of the contract can be completed sooner.
 Argue No: Why might people say this is screwy? Look at the true intent of the parties. It is clear, B has said he rejects.
No true meeting of the minds. What if the letter gets lost upon return? This may occur in less than 1% of the cases and
shouldn’t set the majority rule.
Humble Oil v. Westside. Westside granted to Humble an exclusive and irrevocable option to purchase for a consideration of $35,000
a tract of land. Humble could exercise the option by giving notice at any time prior to 9:00pm on the 4th day of June. Earnest money
of $1750 was paid plus $50 consideration at time of execution of option contract. Balance of $33,200 left to be paid. Seller argued
that Humble’s letter sent to seller was conditional acceptance therefore a rejection of the option contract. Court held that choosing to
negotiate before accepting an option does not repudiate the option contract. The option is an independent completed agreement and
gave the optionee the right to purchase within the time specified.
 Rule of this case: Clear intent of the optionee to terminate will terminate. Options are firmer than a mere offer. This
could be an attempt at a second preliminary agreement—an exception to the rule that counteroffers terminate offers.
What is the intent of the parties?
 Consideration is needed to keep the offer open.

Auctions
1. With Reserve—Bids as Offers? (The auctioneer may reject the highest bid and refuse to sell)
2. Without Reserve—Bids as Acceptance? (The auctioneer must sell to the highest bidder)

Well v. Schoeneweis. Defendants agreed with the auctioneer that they would offer the farm on an option as well as under the terms of
the sale bill. The option was to allow the highest bidder to purchase the farm with a 10% down payment on the day of sale, then
quarterly payments for ten years under a contract for deed. Plaintiffs were successful bidders and tendered their check in the amount
of 10% of the purchase price. Then a dispute erupted concerning the meaning of “quarterly payments.”
 The fundamental rule at common law is that a bid at an auction constitutes an offer to buy, the fall of the hammer
constitutes the acceptance, and a contract is then made. Buyer agrees to buy at bid price and seller agrees to sell and
convey at the bid price. Publicly proclaimed terms of the sale are binding on both parties.
 Any written contract would be nothing but a memorialization of what had taken place at the auction. No additional
written contract necessary before the contract was made. After hammer falls there is no room for additional negotiation.
 Buyer successfully sues for specific performance.

Specialty Maintenance v. Rosen Systems. Specialty sues Rosen, alleging a violation of the Deceptive Trade Practices Act by
advertising goods for auction with intent not to sell them as advertised. Rosen conducted an auction and Garringer, Specialty’s
production manager, wanted to buy a mill. The mill was listed in the catalog without a minimum bid specified. Garringer bid $2,000
and Rosen identified him as the bidder but shook his head, “no.” Rosen did not make the sale. Rosen rejected his bid b/c it was too
low. Disagreement over meaning of terms, “without reserve” and “with reserve.” Rosen testified that when he mailed out the
brochure, he intended, despite its language, to conduct the sale “with reserve,” (auctioneer may reject the highest bid and refuse to
sell) in accordance with the rules of the catalog, the bidder’s card, the industry custom, and his company’s practice. Rosen admitted
the language of the brochure was misleading. The Ct. of Appeals holds that the evidence supports an inference that Rosen intended to
convey a false impression; however, a jury could infer that experienced auction buyers, to whom the brochures were given, would
know the law and customs of the trade and would assume the auction was with reserve.
 In an auction without reserve, bids are acceptances.
 What if an advertisement is quiet about w/or w/o reserve? Default is “with reserve.” The auctioneer may reject the highest
bidder and refuse to sell.

Rewards (Rest. 46)—Rewards generally serve as the offer. You can revoke offers for rewards.

James Baird Co. v. Gimbel Bros. Traditional common law view. Dept. of Highways in PA had asked for bids for the construction of
a public building. The defendant sent an employee to compute the amount of the linoleum which would be required for the job, and
he underestimated the total yardage by one-half the proper amount. The plaintiff, received the bid on the twenty-eighth, and on the
same day the defendant learned its mistake and telegraphed plaintiff that it withdrew the bid and would substitute a new one at about
double the old. The public authorities accepted the plaintiff’s bid on December thirtieth, which was based upon price quoted by
defendant. Unless there are circumstances to take it out of the ordinary doctrine, since the offer was withdrawn before it was accepted,
the acceptance was too late. (Rest. 35) Defendant argues promissory estoppel (Rest. 90) but the court holds that an offer for an
exchange is not meant to become a promise until consideration has been received. In this case, the defendant offered to deliver the
linoleum in exchange for the plaintiff’s acceptance, not for its bid, which was a matter of indifference to it. That offer could become a
promise to deliver only when the equivalent was received; that is, when plaintiff promised to take and pay for it. No promissory
estoppel. No contract.
 Parties seeking a bilateral contract—no promissory estoppel. Judge Learned Hand sees a bilateral contract where
Traynor finds a unilateral contract.
 We could use a condition precedent approach—make a contract but use a condition precedent, “we are not going to
provide the linoleum unless the third party (k2) is won by the contractor.” Cosean contracting—lower transaction costs.
 Stone likes this view—clear planning to avoid the slipper slope of justifiable reliance.
 Three questions we always ask about these competing views: (1) what incentives are created with the two views? (2)
What are the costs and benefits of each view? (3) what is the economic impact of the two views? (Traynor view v. Hand
view) (maximization of economic pie, minimum economic waste, lower transaction costs, etc)
 Rule: Ever since James Baird v. Gimbel Bros, the courts have uniformly refused to treat the general’s use of the
sub’s bid as acceptance which would bind the general contractor. Instead, the sub’s bid is treated as an offer to form
a bilateral contract, and the general is bound only if he accepts by a return promise.

Drennan v. Star Paving Co. (Traynor View – Reliance Doctrine APPLIES) Landmark Modern California view. Offer or bid is based
on mistake and Star wants to revoke bid. Drennan covers and sues for the difference in cover and bid. General rule is bids as offers.
Two questions: Was the offer revoked by Star? Did reliance make the offer irrevocable? If the offer is revoked, we never get to issue
of acceptance. Traynor says no revocation—justifiable reliance. Rule: Where there is an offer for a unilateral contract, if part
performance occurs, the offeror cannot revoke if the offeree justifiably relies on the offer. The contractor used the bid (K1) in
order to make his general bid (K2).
 Traynor says it is a unilateral contract. General contractor makes the offer (promise) and subcontractor accepts with
an act. Subcontractor’s act of submitting a bid is part performance, so the offer is irrevocable. General relied on the
subcontractor’s bid in making his bid so the subcontractor’s offer is irrevocable. Traynor finds justifiable reliance.
 In Dickinson v. Dodds, there was an express promise to keep the offer open. The court still said offeror may revoke.
Here with only an implied promise, the court says you may not revoke. Does that make sense? No. Traynor sees
this as different from Dickinson b/c there has been justifiable reasonable reliance in this case.
 The general contract can take the subcontractor’s bid in order to make his own general bid; however, he can shop
around after winning the bid for a different subcontractor. But the subcontractor cannot sue the general contractor
b/c no contract has been made between the two.
 Since when does acceptance by a third-party make a contract between the offeror and offeree? There is only a
contract once the K2 is earned and won. Does Drennan violate Rest. 54(2)?
 You can argue that Rest. 90 would help out the subcontractor who wants to get out of his bid. We always argue
Rest. 90 for the general contractor, but wouldn’t it be “just” to allow the subcontractor to get out of his bid? Is this
Traynor view one-sided? That is the criticism Traynor receives here.
 Two approaches: (1) Rest. 45, 87, and 90 approach. Implied promise—offeror can’t revoke if there is justifiable
reliance. (2) Slippery slope--promissory estoppel—Rest. 90.
 In Drennan, we held that implicit in the subcontractor’s bid was a subsidiary promise to keep his bid open for a
reasonable time after award of the prime contract to give the general contractor an opportunity to accept the offer on
which he relied in computing the prime bid.

We’ve got a debate between Hand (judicial restraint and leave expansion of the law to the legislators) and Traynor (judicial activism as
he slides down the slippery slope of equity). Estoppel is a limited concept. We’re fooled into thinking we’re going to get this
emotional response from the courts for equitable estoppel. Rest. 54(2) No notice of acceptance.

Restatement 87(2)
An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the offeree
before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid
injustice.

Another Look at Construction Bidding and Contracts at Formation


Even when the promissory estoppel doctrine is properly applied, its value and adequacy are limited because it protects only the
general contractor. Although the sub is bound once the general uses the bid, the general has the choice of reopening negotiations with
other subs. This allows him to use the low bid as a lever to deflate bids from other subs and encourages other subs to undercut the low
bidder after the prime contract has been awarded. The general can thus enforce the bid against the sub, or, at his option, give up the
bid made firm by promissory estoppel and shop for lower bids. Subs will begin to puff their initial bids to leave room for later
negotiations. Moreover, when a sub accepts a lower price to avoid losing a contract, he may be tempted to cut corners, producing a
less satisfactory job. Do we always take the lowest bid? No, we take into consideration the reputation of marketplace, quality of work,
reliance of subcontractor.
 No intent to contract if initial bid is not held to be final.
 Notes to cases show bid shopping is common practice in the business. We have a problem upfront of businessmen saying and
acting accordingly that they use the beginning bids as beginning numbers for negotiation. It argues no intent to rely on subs
bid if he in fact is going to use someone else’s bid. How sincere is “I love you in the morning” promise?
 Traynor generally pulls for the general contractor, in reliance, but what about the subcontractor?

Four Nines Gold v. 71 Construction, Inc. Four Nines (general contractor) received lowest bid from 71, but 71 made a mistake and
contacted Four Nines but couldn’t get anyone, so they called the City Engineer (the person who receives bids from all general
contractors). The City Engineer had previously told Four Nines that they were to receive the contract b/c they had the lowest bid;
however, city rejected all bids and put out the project for new bids to protect the economic interest of 71 when it found out about the
mistake. Four Nines lost the contract and sued for wrongful interference with contractual relationship and breach of an implied
covenant of good faith and fair dealing. Summary judgment for 71.
 Rule: Four Nines use of the sub-bid did not create a contract between Four Nines and 71 Construction under a theory of
promissory estoppel since no binding obligation is created until the prime contractor’s bid was accepted.
Allen Campbell v. Virginia Metal Industries. Virginia Metal submitted a quote for supplying all hollow metal doors and frames
required by the plans and specifications necessary in a contract Campbell was bidding for and Campbell used the quotation in the bid.
Virginia Metal thereafter refused to enter into a contract to supply the doors and frames and Campbell was forced to buy them from
another supplier at an increased price. In the case pleaded by Campbell, the elements of promissory estoppel are clearly present. The
court held there was a sufficiently binding promise by Virginia Metal. The court also recognized that promissory estoppel will, in
circumstances like those here presented, render inapplicable the UCC statute of frauds. The fact that the promise was entirely oral
would not bar recovery. Rest. 139 (reliance as a means of avoidance of the statute of frauds).

Montgomery case. Montgomery submitted a bid to Thomas, the prime contractor, and informed Thomas that detailed plans of the
system would not be provided. Thomas used the bid and then Montgomery informed Thomas that there was a deviation from the
system bid by Montgomery and the system called for in the plans. Three days later Thomas was awarded the contract. Montgomery
wanted more money to supply the system according to the plans. Thomas entered into the contract with Montgomery for the increased
amount. The evidence is undisputed that Thomas received nothing for the increased price nor was Montgomery required to perform
differently or give up anything in exchange for the price increase. Once the work was performed, Thomas refused to pay Montgomery
the extra amount. Montgomery sued but lost. The court relied on promissory estoppel, citing Drennan, and held that Montgomery
was bound by its original, lowest offer.

Hand—bilateral contract, need express promises and offers can be revoked.


Traynor—unilateral contract, implied promises, cannot be revoked.

Peterson v. Patterberg. (Old Strict Common Law View) Defendant agrees to reduce the debt if plaintiff pays early. P formerly tenders
payment to D. He “offers” to pay. Is it an acceptance or offer? Did P accept the D’s (Pattberg) offer? Was the offer revoked prior to
acceptance (like Dickinson v. Dodds)? P tried to accept, but when he shows up to pay, the D won’t accept payment. The court doesn’t
see proper acceptance. This was a unilateral offer—a promise for an act and we didn’t get the act. Rest. 52 “offeror is master of his
offer.” Basic rule of law: offer for unilateral contract can be accepted ONLY by an ACT and not a promise. Dissent agrees it’s
a unilateral contract—he seems to see that justice demands it, there was a good faith obligation in the offer and there was an act—
showing up at D’s place indicating he was ready to pay. Minority opinion: Rest. 50(2), 45. Majority opinion Rest. 50(1), 53, 58.
Could argue showing up was mere preparation to perform, not performance. In the request, the performance is payment. Not talk of
paying. No “I will love you in the morning” promises. The debtor could have made a bilateral contract to avoid this problem—a
promise for a promise, that binds both parties at the point of contract. What act is left at doorstep for P to do? Just mechanically
handing over the money. Rest. 205. Until the money is in the D’s hand, the P could have taken the money back. You want a clear
binding contract as opposed to relying. This is problem with Hand v. Traynor. This “good faith opinion” approach is like Traynor’s
estoppel mess—justifiable v. unjustifiable reliance. No law to tell you when there is good/bad faith or justifiable/unjustifiable
reliance. How do we argue against using “good faith” test? If we can’t define it, how can we use it as a standard of law? Plus, offeror
is master of his offer. 50(1) and 52 approach. Offeree must do the mechanical act of handing over the money. Whose contract is it
anyway? The more we complex it up with concepts of fairness and equity—the judges end up making the contracts, and the offeror is
no longer master of his offer. The law must reflect the reality of the marketplace not some Judge’s opinion of the marketplace. There
is an extreme risk on part of P that there will be nothing to accept when he shows up to pay. No land.
 Simple rules for a complex world. If you have an offer that demands performance for acceptance, there is no acceptance until
there is complete performance. It is simple.
 Unilateral contract—offeror wants performance, not mere preparation to perform.

If A says to B, “I will give you $100 if you walk across the Brooklyn Bridge,” and B walks—is there a contract? It is clear that A is not
asking for B’s promise to walk across the bridge. A wants the act of walking across the bridge. When B has walked across the bridge
there is a contract, and A is then bound to pay B $100. At that moment there arises a unilateral contract.
 Unilateral Contract: When an act is thus wanted in return for a promise, a unilateral contract is created when the act is
done. It is clear that only one party is bound. B is not bound to walk across the bridge, but A is bound to pay B $100 if B
does so. Thus, in unilateral contracts, on one side we find merely an act, on the other side a promise. Unilateral contract has
one stage, (1) acceptance and performance.
 Bilateral Contract: In the case of the bilateral contract both parties, A and B, are bound from the moment that their
promises are exchanged. Thus if A says to B, “I will give you $100 if you will promise to walk across the bridge,” and B
then promises to walk across the bridge, a bilateral contract is created and both parties are bound. A contract is created as
soon as mutual promises are agreed upon. Bilateral contract has two stages (1) Section 50—whether or not the contract was
created, and (2) performance.

Let us suppose that B starts to walk across the Brooklyn Bridge and has gone about one-half the way across. At that moment A
overtakes B and says to him, “I withdraw my offer.” A withdrew his offer before the act was performed and A is perfectly within his
rights in withdrawing his offer before B has accepted it by walking across the bridge—the act contemplated by the offeror and the
offeree as the acceptance of the offer. A is not bound since no contract arises until the completion of the act called for. Then, and
not before, would a unilateral contract arise. Then A would be bound.
Let us suppose that after A has withdrawn the offer, B completes the act of walking across the bridge. B was not then bound to
complete the crossing of the bridge. If B is not bound to cross the bridge, why should not A also be will-free? Both parties have the
same right to withdrawal at any time before acceptance has occurred through completion of the act. B could have stopped walking
mid-way on the bridge, since he never agreed to walk across the entire bridge; therefore, A has, and should have, the same privilege to
draw back the offer. A cannot bring suit if B stops walking halfway across the bridge; therefore, if A wants to revoke when B is
halfway across the bridge, A has the option just as B does.
 Old strict common law doesn’t choose sides—both sides in a unilateral contract take risks that the other side will not perform
or revoke.
 Which has the lower transaction cost, the old strict common law or Rest. 45 and 50(2)? Both common law, Petterson v.
Pattburg, and the restatement can be argued to have some harshness.
 Can B recover something under a quasi-contract of some kind? Wouldn’t you expect for there to be some enrichment to the
offeror in order for B to recover? Yes. There should be some enrichment in order for B to recover damages; therefore B
CANNOT recover because A has had NO unjust enrichment.
 When A asks for performance from B to build a garage and then revokes when B is midway through. We pay B under the
implied contract realm. Don’t call this pure unilateral contract. B has begun a “substantial and expensive” performance—
and that language will sometimes push a court to an equitable remedy.
 Common law does compensate for part performance if there is unjust enrichment of the other party. But no payment for risk-
taking that has no benefit to the other party.

Brackenbury v. Hodgkin. (Modern View—Opposite of Petterson) Mother made proposal to daughter and her husband that if they
would take care of her for the remainder of her life, then she would give them the place when she passed away. Relying on this offer,
in acceptance thereof, the plaintiffs moved from Missouri to Maine, went upon the premises described and entered upon the
performance of the contract. Trouble developed and the mother asked the plaintiffs to leave. The mother then executed a deed to her
son conveying her property to him for the sole purpose of evicting the plaintiffs. Plaintiffs brought suit to secure a reconveyance of
the farm from Walter to his mother. Court found in plaintiffs favor. Court held plaintiffs here accepted the offer by moving and
entering upon the performance of the specified acts, and they have continued performance since that time so far as they have been
permitted by the mother to do so. There was a valid unilateral contract.
 Despite the logical nature of the arguments in favor of the revocability of offers for unilateral contracts, several early courts,
like the one in Brackenbury, refused to allow the offeror to revoke after the offeree began substantial and expensive
performance.
 Could argue this is just preparation to perform, which is not enough to constitute acceptance.
 This is a case of “Laws have Consequences”—
 Facts like the Kurksy (sp?) Farm case, pg. 189.
 If the court took the common law approach: best case—find some dollar amount of the care the mother received but no
specific performance.
 Here we need the creation of contract here—court takes 50(2) here—the daughter partly performed by moving and taking
care of her mother.
 Criticize court: any intent for this kind of contract? Mom is the master of her offer and she asked for lifetime care, the act
would be full performance, not part-time performance. The daughter receives unjust enrichment. The court created this
unjust deal. This is a windfall win for daughter. This is unique b/c the daughter receives unjust enrichment, rather than the
mother.
 Common law approach and Patterson v. Pattburg—did not say we need a court-determined approach to determine contract,
whose contract is it anyway? If the court uses an “at fault” approach (they determine it was the mother’s fault for the tension)
—the mom could argue that her daughter is not taking good care of her. Two can play at this game.
 Good faith v. Bad faith. Court says bad faith, without calling it that. What is the test? This becomes a “dirty linen” contest
—a fault analysis. Fault is the 40 mph maybe problem. How much fault is too much fault? The Restatement approaches say
nothing about fault. It is power substituted for the restraint of law.
 Couldn’t it also be argued that this is an estoppel case? The daughter relied on the mother’s promise and mom should be
estopped from revoking her offer.
 How else is the court harsh against the mom? Mom has to fully perform and daughter has to part-perform.
 Only apply equity (equitable remedy) if plaintiff (1) has no equitable remedy at law and (2) if plaintiff has irreparable harm.
What about the reasonable expectations of the parties here? The daughter’s expectation was to provide full performance and
she gets the farm in the end. How do you argue no reasonable expectations to the farm? The long-term family relationship is
subject to statistical probability of breakup regardless of who is at fault unless full performance w/o discord. The court has
sentenced mom to a living hell.
 To avoid all of this, as attorney for the daughter, she should get a bilateral contract on the front-end.
Acceptance by Part Performance
 Rest. § 45 Approach - When the offeree tenders or begins the invited performance, an option contract is created. The offer
can’t be revoked once performance has begun.
 Rest § 50(2) Approach – Acceptance by performance requires that at least part of what the offer requests be performed.
Let us assume A says to B, “If you will put my sugar-house machinery in good repair I will pay you $100 for the job, and if you will
begin immediately I will give you a reasonable time to complete the work.” There are two offers here. One, the principal offer of
$100 for the repair of the machinery; another, or collateral offer to keep the principal offer open for a reasonable time if the offeree
begins work at once. The principle offer contemplates acceptance by the act of repairing the machinery, and no contract will result
until the machinery is fully repaired. The collateral offer also contemplates a unilateral contract, the acceptance to be beginning the
work at once.

Restatement 45
(1) Where an offer invites an offeree to accept by rendering a performance and does not invite a promissory acceptance, an
option contract is created when the offeree tenders or begins the invited performance or tenders a beginning of it.
(2) The offeror’s duty of performance under ay option contract so created is conditional on completion or tender of the invited
performance in accordance with the terms of the offer.
(Beginning preparations though they may be essential to carrying out the contract or to accepting the offer, is not enough. The actions
must be part of the actual performance requested.)

If a person just begins mere preparations to perform, then the conduct would not trigger Rest. 45 but preparations to perform may,
however, constitute justifiable reliance sufficient to make the offeror’s promise binding under section 87(2).
 If an offeree is viewed as having begun to perform when the offeror revokes, the offeree’s rights are determined under Rest.
45 and an “option contract is created,” but the offeror’s “duty of performance is conditional on completion or tender of the
invited performance in accordance with the terms of the offer.” Rest. 45(2)
 On the other hand, if the offeror revokes his offer before the offeree has begun to perform but after he has relied on the offer
by preparing to perform, the offeree’s rights are determined under Rest. 87(2); such an offer “is binding as an option contract
to the extent necessary to avoid injustice.”

Rest. § 87(2) Option Contract


(2) An offer which the offeror should reasonably expect to induce action or forbearance of a substantial character on the part of the
offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to
avoid injustice.
 The only difference between Rest. 45 and 87(2) appears to involve the measure of damages: section 45 leads to the normal
expectancy recovery while 87(2) may lead to an expectancy recovery or something less.

Restatement 47
An offer contemplating a series of independent contracts by separate acceptances may be effectively revoked so as to terminate the
power to create future contracts, though one or more of the proposed contracts have already been formed by the offeree’s acceptance.

Sunshine v. Manos. Plaintiff sued defendants for breach of a loan brokerage contract and lost in a summary judgment to defendants.
This court reversed. Defendants made a unilateral offer offering to pay 1% of the loan amount if plaintiff could secure a loan at a
specific amount with a specific interest rate. Defendant secures a loan with a different rate of interest and with two additional
conditions on defendants. It was not full performance. Defendants did not want the loan and told plaintiff not to work on it anymore.
The promise defendants made was such that they should have expected to induce action of a substantial nature. Plaintiff did
subsequently enter upon performance and expended at least some time and effort in attempting to negotiate the loan before defendants
rescinded. The court held that expenditure of time and effort is sufficient consideration to make a unilateral contract binding
and irrevocable. The unilateral offer ripened into a binding contract.
 Issue: whether the acts and conduct of plaintiff constituted part performance amounting to an acceptance of an offer.
 Sunshine says “I tried” but he failed to meet the specifications of the loan.
 Defendant made an offer but then he revoked. This is Petterson all over again—before acceptance we had revocation. Rest.
58—necessity of acceptance complies with terms of offer.
 On appeal, court held (Rest. 50(2)/45) part performance of time and effort is enough to make contract irrevocable.
 What about mere preparation for performance v. actual performance? Defendant tried but was only mere preparation b/c the
act is obtaining the loan with proper terms. Law for losers. Preparatory inquiries. On the other hand, you could also argue
we have the act of beginning performance here b/c the agent made inquiries, and negotiations and can become part of a
seamless web and they may be able to simply adjust the rate and obtain the correct specifications.
 The test on damages per the court—find value of P’s services rendered and look at profits P would have made on the contract
if we can show D would have obtained a loan on its terms.
 Who should have been sued here? The borrower should have sued the agent for breach.
 Could D do nothing and let the P’s non-performance die? Rest. 41 or 49?. The problem with that is that we are trying to
structure transactions not let them die. We can avoid this by using a bilateral contract and then there is no recovery unless
there is performance according to the terms.
 What about all the waste we have here? The courts are going down the slipper slope of equity.

Davis v. Jacoby. Court found bilateral contract. Mr. and Mrs. Whitehead had a niece that was like a daughter to them, Caro Davis.
When Mrs. Whitehead was put in the hospital and Mr. Whitehead was having financial difficulty—he wrote asking for Caro and
Frank, her husband, to come and stay with him, see his wife, and help him settle his matters financially. Mr. Whitehead said that
under the will, he believed, everything was going to Caro. Mr. and Mrs. Davis agreed to come up in two weeks. Mr. Whitehead
committed suicide before they left. Mr. and Mrs. Davis immediately went to see Mrs. Whitehead in the hospital and took care of her
until her death about a month later. At that point, they found the will granted their nephews the inheritance. The court found that Mr.
Whitehead’s offer was an offer to enter into a bilateral contract taking the offer in context with surrounding circumstances. Mr.
Whitehead specifically requested an immediate reply and thus indicated the nature of the acceptance desired by him was appellants’
promise that they would come to California and do the things requested by him.
 Mr. Whitehead makes an offer—that if they can come they will inherit everything.
 After Whitehead commits suicide, they still move to accept the offer. But Mr. Whitehead left everything to his nephews.
 D argues: No acceptance b/c death of offeror before acceptance. Rest. 48 would wipe it out.
 Issue: is this offer an attempt at a unilateral or bilateral contract? Does the offeror seek an act or a promise in return for
acceptance? Rest. 32: Supreme Ct. says it is presumed the formation of a bilateral contract in cases of doubt. A
bilateral contract immediately protects the reasonable expectations of both parties.
 Can you argue the expectation of the defendant was not a return promise? Talk is cheap—he wants substance and not form.
He wants an act not a promise and all of this is just Rest. 26 preliminary negotiations. Whitehead wants the act of moving.
On the other hand, Whitehead wanted assurance in promise they’d come for peace of mind.
 Who would be the lower cost provider here? Who has more economic self-interest in clarity here? The people in Canada
have more to lose. Selling property, moving to Ca, etc. The older man could find substitute help possibly at a lower cost.
Rest. 32.
Restatement 32
In case of doubt an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests
or by rendering the performance, as the offeree chooses.

Restatement 62
(1) Where an offer invites an offeree to choose between acceptance by promise and acceptance by performance, the tender
or beginning of the invited performance or a tender of a beginning of it is an acceptance by performance.
(2) Such an acceptance operates as a promise to render complete performance.

Empire Machinery v. Litton. Empire wanted to acquire and “interconnect” telephone system with a “superplex” switch. After
negotiations, Litton sent Empire a letter that stated “upon receipt of a signed order and deposit” they’d install the equipment. Empire
signed an agreement created by Litton and delivered a check as the down payment. The agreement read that it shall become effecting
only “upon approval, acceptance, and execution by Litton. Litton argues that b/c of this clause, the offer was never accepted. Empire
argues that the clause can be waived by it and assented to by Litton and the conduct of Litton subsequent to the submission of the
agreement shows such assent. Both sides cite to UCC 2-206. Litton cashed the down payment check and installed the interconnect
system. The court held that “the rule should be that if the offeree takes steps in furtherance of its contractual obligations which would
lead a reasonable businessman to believe that the contract had been accepted, such conduct may, under the circumstances, constitute
acceptance of the contract.
 At trial court: Finds a bilateral K view and says that D never consummated the agreement so no recovery for
P’s. Court of appeal reverses and says Unilateral K and that D’s accepted by part performance of the K and
allowed P to waive a portion of D’s own form by said performance.
 How did P waive the relevant section that required acceptance only by the home office?
a. B/c we got a new offer by the buyer
b. S lost control of its form
 OR is the master of his own offer and consistent w/ form sends the check
 Litton (D) by performance accepts the offer of Empire (that made by sending the check).
 Ee becomes the seller and the buyer becomes the offeror using the seller’s sales form.
 Empire wants an act of doing or a promise of doing R. §32 allowing the offeree to choose their acceptance (and did so by
cashing the check and other things).
 Consider 2-206, §62
 Lessons: Just b/c you draw up the form doesn’t mean you’ll retain control, When use language of paragraph 6 (the clause)
court looks at substance of the matter over form.

Bishop v. Eaton. Defendant wrote to plaintiff, “If Harry needs more money, let him have it, or assist him to get it, and I will see that it
is paid.” Harry needed more money and plaintiff signed this note as a surety. Shortly after signing the note, plaintiff deposited a letter
in the mail, addressed to defendant notifying him of the note. Defendant never received the letter. The defendant served as guarantor
—the original debt was from Harry to the person furnishing the money, and if Harry failed to pay, the defendant would relieve him
from liability. It was an offer which was to become effective as a contract upon the doing of the act referred to. And, if the act is of
such a kind that knowledge of it will not quickly come to the promisor, the promisee is bound to give him notice of his acceptance
within a reasonable time after doing that which constitutes the acceptance. In the present case, the plaintiff seasonably mailed a letter
to the defendant, informing him of what he had done, although he never received it. The court held that plaintiff did all he was
required to do, after assisting Harry to get the money, when he seasonably sent the defendant the letter by mail informing him of what
had been done.
Newman v. Schiff. Newman claimed that Schiff had made a public offer of reward to anyone who could cite any section of the
Internal Revenue Code that says an individual is required to file an income tax return. Newman asserted that he accepted Schiff’s
offer, and that Schiff breached the contract by failing to pay him the reward. The district court ruled in favor of Schiff by finding that
Newman’s acceptance was not timely. Newman telephoned to accept the offer the day after the tv show aired and the court
determined the offer was only open for acceptance during the live program. The rebroadcast did not constitute a renewal of Schiff’s
original offer. An offeror is the master of his offer and Schiff stated, “If anybody calls this show” limited his offer to remain open only
until the conclusion of the live broadcast.

The Law of Rewards


 The offer in a reward is made publicly, usually by an advertisement, and the acceptance must be the performance of the act
that is called for (a promise will not suffice). These two features raise unique problems that are not likely to be found in other
types of contracts.
1. Must the person claiming the reward have been aware of it when he performed the act in question?
The black letter law clearly requires an offeree to be aware of the offer if the performance of the act called
for is to be an acceptance of the offer. The offer of a reward is intended to induce action by people. A
person who acts without knowledge of the reward is not induced thereby and arguably is therefore not
within the class or group of persons to whom the offer was addressed. A well-recognized exception exists
for offers of rewards by governmental bodies, which arguably are not contractual at all but a governmental
act that is designed to encourage all citizens to assist in the performance of some generally desirable action.
A person may recover on an offer for a reward by the government even if ignorant of the existence of the
offer.
2. Lapse of Reward Offer. The black letter rule is that an offer lapses after a reasonable time.
3. Revocation of Reward. Restatement 46: “Where an offer is made by advertisement in a newspaper or
other general notification to the public or to a number of persons whose identity is unknown to the offeror,
the offeree’s power of acceptance is terminated when a notice of termination is given publicly by
advertisement or other general notification equal to that given to the offer and no better means of
notification is reasonably available.” Persons aware of the offer but unaware of the revocation (when
published in the same manner as the offer) are nevertheless bound by the revocation.
4. Whether Performance is Acceptance. Reward offers may also give rise to unique problems in the area of
acceptance which, of course, must be the performance of the act or acts requested.
a. Some Part of Acts Performed Before Learning of the Reward: Rest. 51 states that an offeree
who learns of a reward offer after he or she has rendered a part of the performance requested, may
accept by completing the requested performance. This is based on the theory that reward offers
are usually motivated by a desire for the completed act and that completion of performance is as
valuable to the maker of such an offer as the entire performance.
b. Actions Taken Pursuant to a Legal Duty: The black letter rule is that a public official who is
under a legal duty to perform an act may not claim a reward that has been offered for performance
of that act. Rest. 73.
c. Actions Not Motivated by Reward: Even if a person’s actions are not motivated by the reward
but they know of the offer and complete the act of acceptance, most courts will give the person the
reward.
d. Actions Different from the Requested Acceptance: If persons achieve the intended goal of the
reward but do so in a different way from the requested acceptance, many times a court will allow
recovery for reward.
e. Apportionment of Rewards.
f. Reliance on a Reward Offer.

Section 4: Acceptance By Silence or By Acceptance of Benefits


Hobbs v. Whip. Silence as acceptance. Plaintff had sent eel skins in the same way four or five times before and they had been
accepted and paid for. Indeed, there was a standing offer for such skins by defendant. There was a duty on the defendant to act about
them since the plaintiff sent them. Silence on its part, coupled with retention of the skins for an unreasonable time, might be found by
the jury to warrant the plaintiff in assuming that they were accepted, and amount to an acceptance. Rest. 69—requires more than mere
silence for acceptance. No express contract.
 Mere silence CANNOT amount to acceptance is the general rule
1. Certain things however may amount to a form of acceptance
a. Conduct expressing intent to accept (if D had used the eel skins).
b. Prior course of dealings – b/c P had shipped to D w/o request 4 or 5 times before.
c. Usage of trade.
 Court finds course of dealing and assumes acceptance
1. Argue that there is not a K
a. Can’t assume anything and these previous K’s were independent of each other.
2. How did court find K?
a. Used objective K to say that previous K’s are not exclusive events
b. Does court assume too much and come close to reliance?
3. Argue for the court
a. Efficient use of info (previous dealings)
b. past is status quo and w/o info to reject we use past effectively
c. More efficient to pursue the good track record of success.
 Any other possible legal vehicle for P?
1. Maybe a bailor/bailee relationship responsibility theory
2. Doesn’t call for finding a questionable K.
3. Tort, conversion wrongfully holding material.

Roberts v. Buske. The court says that silence is not acceptance. Plaintiff sent defendant an unsolicited renewal for auto insurance and
a notice attached stated that if defendant did not wish to accept it he must return it or be liable for the premium. Defendant made no
response and paid nothing. The court could not find that acceptance of a single previous renewal policy was in itself sufficient to
constitute an implied acceptance of a second renewal based solely on the silence of the offeree. This case is different from the Whip
case b/c the court treats this course of dealing differently. One prior course of dealing was not enough. Argue yes/no on the exam to
answer “what is prior course of dealing?”

General Rule: Silence is not acceptance, but it can be acceptance: Prior course of dealing, usage of trade, conduct expressing intent to
accept (retention and use of the goods).

Kukuska Case. How much time is reasonable time before acceptance by silence? Court sees time as of the essence here. There is a
duty to a quick response when insuring against the hail storm. There is a duty by the insurer and if failing to perform the duty within a
reasonable time causes the applicant to sustain damage, the insurer is liable for Kukuska’s loss.

Ransom V. The Penn Mutual Life Ins. Co. Defendant refused to perform a contract in which it agreed with plaintiff’s deceased
husband, Ralph Ransom, to insure his life. Ransom was examined by a doctor, filled out the written application, and sent the first
payment premium in full. Defendant requested Ransom to submit to further medical exams, because he was obese, but he was killed
in an auto accident before he could arrange those second examinations. Court holds that the company would have an obvious
advantage in obtaining payment when the application was made, and it would be unconscionable to permit the company, after using
language to induce payment, to escape the obligation which an ordinary applicant would reasonably believe had been undertaken by
the insurer. Life insurance company says no approval and no acceptance. The facts do not show a clear intent to accept so we have to
look at silence as acceptance as a possibility here. The payment and form filled out to the office and cash was checked. Plaintiff’s
application is an offer and until the insurance company terminates, there is an acceptance. There is a risk of death in the interim and it
will be born by the home office. Rest. 58. Who’s contract is this anyway? Did the parties create a contract here or just the court?
The court raises unconscionability and reasonable expectations. Unconscionable—Ransom paid the premium and it would be
unconscionable not to insure when they have a payment made. The insurance co. gets no free lunch. Otherwise, they receive payment
for no insurance coverage. Furthermore, Ransom had reasonable expectations that he was covered once he paid the premium. Who
should bear the risk here of death in the interim? The court says the insurance company as if it were a renewal policy. But in the
Roberts case the court did not find silence as acceptance. The court awards an overcompensation to the plaintiff. Ransom gets a
windfall. The unconscionability can cut two ways—it may be more unconscionable to allow a windfall for the plaintiff. We could
argue there should not have been reasonable expectations b/c payment of premium is not all that the contract called for—it was
contingent upon approval. Ransom should have read his contract! Read your contract, honor your contract—why not here? The
insurance co. keeps the approval clause because individuals like Ransom may either not know of their bad physical health or may try
to defraud the company. Other policy holders will pay the premium for covering Ransom. The Court is a big, private welfare agency
in this case. Plaintiff gets a windfall. The insurance company and all the policyholders are punished by the emotion of this court.
What incentive is created for the future contracts by insurance companies? They may refrain from taking premiums early. We want
the specificity and clarity of private contracting instead of public ordering by the court, using words like reasonable
expectations and unconscionability.

Insurance Binders
 When a person applies for life insurance coverage and pays a premium pending a medical examination, he may be making
only an offer is one reads literally the application form. However, such a person is likely to assume that he is covered
immediately; certainly he is not likely to try to arrange alternative insurance while the first insurance company decides
whether or not to accept his offer. Courts have generally protected insureds against interim losses unless the absence of
such interim protection is clearly stated in the application form or brought to the attention of the insured.
 When the death of the insured occurs shortly after the application is received, courts have permitted insurers to reject the
application if they can establish that the application would not have been accepted according to the insured’s usual standards.
 Insurance companies in effect issue temporary insurance or “binders” when they accept applications for insurance and initial
premiums.
Felton v. Finley. The attorney worked to fight the will and several of the heirs refused to fight the will. Distributive checks were
made out to each one of the six heirs jointly with respondent and the heirs refused to accept them, taking the position they had never
employed the attorney and were not obligated to pay him. This suit is to establish the implied contract and to enforce the attorney’s
lien. It is an elementary rule that, whenever services are rendered and received, a contract of hiring or an obligation to pay what they
are reasonably worth will generally be presumed. The heirs did pocket the greater amt of inheritance money procured for them by the
attorney, and there was created in law an implied contract of employment. No such thing as a free lunch. Does silence w/regard to the
benefits imply an acceptance? Rest. 69(1)(a and b).
 On rehearing, the dissenting view becomes the majority view—no basis for implied in fact contract. Could the Ransom
insurance case been better decided in this fashion? Could argue the services respondent performed in contesting the will
were performed with knowledge appellants would not employ him, so he was performing the services gratuitously.

Mailing of Unordered Merchandise, 39 U.S.C.A. Section 3009


A. Except for free samples clearly and conspicuously marked as such, merchandise mailed by a charitable
organization soliciting contributions, the mailing of unordered merchandise or of communications
prohibited by subsection (c) of this section constitutes an unfair method of competition and an unfair trade
practice.
B. Any merchandise mailed in violation of subsection (a) of this section, or within the exceptions contained
therein, may be treated as a gift of the recipient, who shall have the right to retain, use discard, or dispose of
it in any manner he sees fit without any obligation whatsoever to the sender.
C. No mailer of any merchandise mailed in violation of subsection (a) of this section shall mail to any
recipient of such merchandise a bill for such merchandise.

Restatement 69
(1) Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases
only:
(a) Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and
reason to know that they were offered with the expectation of compensation.
(b) Where the offeror has stated or given the offeree reason to understand that assent may be manifested by
silence or inaction, and the offeree in remaining silent and inactive intends to accept the offer.
(c) Where because of previous dealings or otherwise, it is reasonable that the offeree should notify the
offeror if he does not intend to accept.
(2) An offeree who does any act inconsistent with the offeror’s ownership of offered property is bound in accordance
with the offered terms unless they are manifestly unreasonable. But if the act is wrongful as against the offeror it is
an acceptance only if ratified by him.

Houston Dairy Case. (Counter-offer). Lender agreed to lend a sum of money to Houston Dairy provided that within seven days
Houston Dairy returned a commitment letter with a written acceptance and payment of a good-faith deposit. The commitment letter
also provided that forfeiture of the deposit was the appropriate measure of liquidated damages in the event Houston Dairy defaulted.
Houston Dairy did not execute the commitment letter until seventeen days later. The cashier’s check was deposited by the lender.
Several days later, Houston Dairy learned they could borrow the same amount at a lower interest rate. Houston Dairy then revoked its
counter-offer and demanded a return of its deposit. The court held NO CONTRACT existed. Once the time period expired, a belated
attempt to accept is ineffective. Lender argues that depositing Houston Dairy’s check was sufficient to operate as acceptance of the
offer. Lender argues that silence plus retention of the money constituted acceptance and notification. The court found otherwise.
Houston Dairy neither had previous dealings nor had be led to understand that the lender’s silence and temporary retention of its
deposit would operate as acceptance. In addition Houston Dairy sent a cashier’s check and it could not have known the check had
been deposited unless notified by the lender.
 Lender’s check deposited but too late to act as acceptance of original offer, so it’s a counter-offer. No acceptance of counter-
offer, mere silence is not acceptance when there is no prior trade usage for the parties to understand silence as acceptance.

“Mirror Image Rule:” Any communication in response to an offer that attempts to accept the offer must conform precisely to
the terms of the offer; any purported acceptance that varies any term of the offer is not an acceptance but a counteroffer.
Offeree must accept offeror’s offer exactly as it is presented to him or we have no acceptance. Rest. 58 and 59, and 32 as well. Under
common law, there is a perfect tender approach under the mirror image rule. It is a strict reading.

The goal is the smooth flow of commerce and we have two approaches. The Relaxing of the Mirror Image rule (socialism of public
ordering) v. Strict following of Mirror Image Rule (private ordering). Courts have a pendulum string between common law strict view
and relaxed mirror image view.

Legislature relaxing the Mirror Image Rule under 2-703—do we have material terms agreed upon? If the answer is yes, we find a
contract and leave the remaining terms to be worked out by parties later. The common law view says acceptance must comply with
ALL terms of offer. Why do critics of relaxed approach complain? Perhaps there really is no meeting of the minds or true agreement.
The parties may never work out the terms that were not agreed upon—if not, who will supply (204—gap fillers by the court) terms?
The court. What and how many terms will be enough to have a material contract? What is “material”?

Roto-Lith Case. Relaxed mirror image rule. Does a reply to an offer which states additional terms fail to act as acceptance? Rest. 59
would say the counter-offer kills the offer here. But the court relaxes the mirror image rule. Rule: A response to an offer which
does not in all respects correspond to the original offer is still an acceptance to the extent it corresponds to the offer. The
additional terms will act as a counter-offer. The court stated, “A response which states a condition materially altering the obligation
solely to the disadvantage of the offeror is an acceptance expressly conditional on assent to the additional terms.” Plaintiff accepted
the goods with knowledge of the conditions specified in the acknowledgment. It became bound. The counter-offer was accepted by
silence and Rest. 69 use of the goods. 2-207 the warranty limitation can become part of the contract. The exception? Unless the
counter offer’s acceptance is expressly conditioned on express acceptance. The court says that wasn’t the case here.
 You could argue the warranty is a material term that “materially alters” the contract and no meeting of the minds.

Itoh v. Jordan Case. (Strengthening of the Mirror Image Rule) Itoh sues but Jordan wants to arbitrate. Jordan, the seller, sent a form
that stated seller’s acceptance was expressly conditional on Buyer’s assent to the additional or different terms—one of which was the
arbitration clause. Itoh neither expressly assented nor onjected to the additional arbitration term. After the exchange of documents,
Jordan delivered and Itoh paid for the steel coils. Court holds that in order to fall within UCC 2-207(1), it is not enough that an
acceptance is expressly conditional on additional or different terms; rather, an acceptance must be expressly conditional on the
offeror’s assent to those terms. Hence, the exchange of forms (buyer sent a form in ordering the coils and seller sent a different form
back) did not result in the formation of a contract under 2-207(1), and Jordan’s form became a counter-offer. “The consequence of a
clause conditioning acceptance on assent to the additional or different terms is that as of the exchanged writings, there is no contract.”
Either party may walk away from the transaction. However, both parties proceeded to performance. When no contract is recognized
under 2-207(1), a contract may be found under 2-207(3) because conduct creates a contract. Performance by both parties under what
they apparently believe to be a contract—recognizes the existence of a contract, notwithstanding the fact that no contract would have
been recognized on the basis of their writings alone. The second sentence of 2-207(3) provides that where, as here, a contract has
been consummated by the conduct of the parties, “the terms of the particular contact consist of those terms on which the writings of
the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.” It is clear that Itoh and
Jordan did not “agree” on arbitration, the only question which remains is whether arbitration may be considered a supplementary
terms supplied by the UCC. The court found the “supplementary terms” contemplated by 2-207(3) to be limited to those supplied by
the standardized “gap-filler” provisions (place for delivery, time for shipment). Since provision for arbitration is not a necessary or
missing term which would be supplied by one of the Code’s “gap-filler” provisions unless agreed upon by the contracting parties.
While a seller may take advantage of an “expressly conditional” clause under 2-207(1) when he elects not to perform, he must
accept the potential risk under 2-207(3) of not getting his additional terms when he elects to proceed with performance without
first obtaining buyer’s assent to those terms.
 The arbitration clause does not become part of the contract. The court here strengthens the mirror image rule here and moves
back toward the common law view of strictness. 2-207(2)(b).
 How do we argue time/place of shipment (gap-fillers) are material terms and should not be supplied by the court? To the
owner of these resources, all parts of the contract are material terms.
 Look in Farnsworth at this—

Criticism of courts weakening the mirror-image rule. 2-207 was not intended to provide “material terms” to the contract but
sometimes courts do. (pg. 574) Have the judges taken the certainty of the mirror image rule and made it into uncertainty.

The UCC differs from common law for flexibility to keep the smooth flow of commerce going.

Daitom, Inc. v. Pennwalt. Daitom purchased dryers from Pennwalt. The dryers did not work as warranted and the suit involved
claims for breach of warranty. Pennwalt’s form (seller) provided that all claims for breaches of warranties had to be brought within
one year after the dryers were delivered while Daitom’s form (buyer) expressly reserved “all rights and remedies available at law.”
Claims were actually asserted by Daitom more than one year after delivery but w/i four years.
 There are three different potential approaches:
(1) Treat different terms as included under the aegis of “additional” terms in 2-207(2). Consequently, different
terms in the acceptance would never become part of the contract, because, by definition, they would
materially alter the contract.
(2) The offeror’s terms control because the offeree’s different terms merely fall out. We end up with the same
result as in the first approach. 2-207(2) cannot rescue the different terms since that subsection
applies only to additional terms. Under this approach, Comment 6, which supports a mutual knock out is
not applicable b/c it refers only to conflicting terms in confirmation forms following oral agreement, not
conflicting terms in the writings that form the agreement.
(3) Preferable approach: The “knock-out rule.” Conflicting terms cancel one another. Under this view the
offeree’s form is treated only as an acceptance of the terms in the offeror’s form which did not conflict.
This case talks about not merely additional terms but different from original terms. Two main alternatives: (1) “knock-out”
approach: the conflicting terms cancel each other out and then look elsewhere in the UCC for possible warranty protection (2-314
implied warranty, or 2-315 warranty for particular purpose), and (2) equate language of additional terms with different terms and
use the previous cases as defining the additional different warranty terms as accepted.

UCC 2-207 deals with the following eight types of cases:


(1) Cases in which the parties send printed forms to one another, and a crucial term is covered one way ini one ofrm and the
other way in the other form.
(2) Cases in which a crucial term is found in the first form sent (the offer), but no term ont hat question appears in the second.
(3) Cases in which a crucial term is found in the second form (the acceptance), but there is no consistent or conflicting term in
the first.
(4) Cases in which a crucial term is found in the second form but not in the first, and the second form is a counter-offer (because
“expressly conditional”).
(5) Cases in which at least one form contains a term that provides that no contract will be formed unless the other party accedes
to all of the terms on that form and offers no others.
(6) Cases in which there is a prior oral agreement.
(7) Cases in which the parties do not use forms but send a variety of messages and letters and conduct intermittent oral
negotiations that ultimately produce an agreement.
(8) Cases in which the second form differs so radically from the first that it does not constitute an “acceptance.”

SECTION 6: PRECONTRACTUAL LIABILITY

The Kearns and Hoffman approach (equity) v. Market place approach and cosean contracting

Kearns v. Andree. Kearns makes changes to the property in order to sell to Andree. Andree then refuses to buy. Kearns sues in
reliance. The contract was oral and was therefore not enforceable under the Statute of Frauds. Recovery is not based upon part
performance here because the repairs they view as a condition for performance—as pre-contractual. Therefore, the basis for the
seller’s recovery here is (Rest. 139, 90) reliance. Argue against recovery—they had a chance to contract here. Plaintiff can’t EXPECT
to RELY on payment for anything with no contract. Plaintiff assumed the risk of making the changes. One of Stone’s clear rules in
law and life. Don’t assume anything. Never say never. You can’t always say always. Use thinking and not emotion. Arguably this
case is a stronger violation of the mirror image rule—here we have failure of the offeree and failure to abide by statutory law, the
Statute of Frauds. The alternative—The plaintiff had a good faith belief the contract was enforceable (Rest. 205). Here the court fills
the gap of the writing—and is the writing a major term, a material term in a land transaction? Of course! A plaintiff failed to look after
his own self-interest and then play’s the victim and seeks reliance. They needed to contract and set out the terms.
A. Court’s rule here is equity for recovery when the K is unenforceable, seller can recover for
expenses made in expectation of fulfillment of K
1. Is essentially justifiable reliance, but here for precontractural liability, parties had not
consummated K relationship yet.
2. P assumed a K and then relied on his own assumption
B. Stones rules of life and contract
1. Don’t assume anything.
2. Never say never
3. You can’t always say always
4. Use thinking and planning rather than emotion and begging.
C. Who should bear the risks?
1. The party who failed to plan and utilize the writing and the statute of frauds.

Hoffman v. Red Owl. Hoffman wants a grocery franchise. Hoffman is told that if he does certain things he will obtain a franchise
from Red Owl. Under the name of equity, is the court providing for redistribution of wealth? It is welfare. This is not a fraud case.
What are Stone’s four rules? One is “don’t ever assume anything.” Here, Hoffman assumed Red Owl would act in good faith and
fulfill their promise. How do we argue there is no legal offer by Red Owl? Could we have only preliminary negotiations under Rest.
26? Not enough material terms? Is this a near-beer offer? Not a real offer. If no offer, nothing to accept. Pre-contractual promissory
estoppel or reliance as recovery theory here. Rest. 90(1). Five elements on pg. 590 or somewhere else? Outline. Other side could
argue—Red Owl had duty of good faith. When is winning losing? If you get the precontractual reliance vehicle, what do you get in
the remedy, and does the remedy gut
1. Hoffman’s ultimate goal was a grocery franchise
2. He was supposed to do many things for the store b-4 he would get said franchise (I will
love you in the morning!), BUT he didn’t follow through.
3. Court provides welfare
B. This is not a FRAUD case
1. Think back to Club Med case and the almost fraud situation there.
2. So, Hoffman needs a legal vehicle to recover under.
3. Don’t ever assume anything---especially fraud into existence.
C. What is his K?
1. He had no offer so he could not purport an acceptance and therefore no K here.
2. This is only PRELIM. NEGOT. And not an offer. Are the franchise terms certain
enough? Terms are missing! Is this a near beer offer?
3. Not a K b/c there was not set terms to seal the deal.
4. Argue Yes:
a. Not a pure breach of K under § 17 so has to argue §90 reliance.
b. Unequal bargaining plane b/w parties, big ol’ mean store v. babe in the Ohio woods
Hoffman.
5. Argue N to liability for Red Owl on bad faith argument b/c there are “costs to being poor” and
shouldn’t punish D for his superior bargaining skills while rewarding P for his ignorance.
Note: Plaintiff is moving party and this franchise will be his entire career so he has all of his eggs in one
basket. He has the most incentive to look out for his own economic self interest but fails to do so. But the
law says that’s okay we will take care of your—justifiable reliance. When is winning losing?? Did the cost
of being poor attach to this guy? The court gave reliance damages. We could argue his reliance damages
awarded were not sufficient- he lost time, energy, etc. But that is the remedy problem of the barge case
uncertainty. Court did not decree specific performance here because it would have been a shot gun
business marriage- a forced relationship. Have the courts really followed the estoppel, reliance doctrine, or
are they still holding on to the common law.
D. Restatement 1st §90—Three Elements
1. Was the promise one which the promisor should reasonably expect to induce action or
forbearance of a definite and substantial character on the part of the promise?
2. Did the promise induce such action or forbearance?
3. Can injustice be avoided only by enforcement of the promise?
E. What could Hoffman have done?
1. Gotten a lawyer to seek out a true K that lists his rights and obligations, getting rid of all
uncertainty of terms and prelim negotiation garbage.
F. Other Notes
1. Court in Hoffman used a disciplined mind by not awarding expectancy damages only
restitution
a. When is winning losing, Hoffman expended all his resources thinking he could
recover his lost profits but only won what he had spent.
2. Why didn’t court grant specific performance?
a. Court won’t force an agreement b/w two unwilling parties (where animosity exists)
comparable to a “shotgun business wedding.”
G. Hoffman Rule: One may in some circumstances come under a duty to bargain in good faith, breach of which duty may
result in liability for damages, at least to the extent of compensating the detrimental reliance of the injured party.
Hoffman is the first in a line of cases in which courts have used promissory estoppel to afford a remedy for negligent promissory
misrepresentation, i.e., to afford relief hen a promise is made to induce a promise to rely in a desired way in circumstances such that
the promisor knows or should know that the promise will appear to be more reliable than it is.

Giant Food v. Ice King. Epple was the owner of Ice King, a corporation that was planning and building a plant to manufacture ice.
Epple relied on Giant b/c of promises they’d use and need ice. Unknown to Epple, Ice King was a fallback position, just in case
Giant’s own ice plant was not ready in time. Epple’s son asked an agent of Giant whether his father should develop other customers
and the agent said no. Held: Giant was liable to Ice King in tort for negligent misrepresentation. A businessman in Epple’s shoes
might have reasonably relied on the informal deal or “gentleman’s agreement” that is the custom of the trade. It is clear that neither of
Giant’s previous ice suppliers had written contracts.

Wheeler v. White (Note Case—Reliance Damages Only)


A. Where the promise has failed to bind the promisor to a legally sufficient K, but where the promisee has acted in reliance
upon a promise to his detriment, the promisee is to be allowed to recover no more than reliance damages (foreseeable
definite damages) measured by the detriment sustained.

Consolidated Grain & Barge v. Madgett (Unenforceable Negotiation Clause). Madgett counter-claimed for enforcement of a
contract clause to “negotiate in good faith.” The court held the clause too indefinite to be enforceable. It is impossible to determine
what Madgett’s share should be, and it is likewise impossible to determine whether Consolidated negotiated in good faith.
Negotiation clause is unenforceable because it is neither a basis for determining the existence of a breach nor for giving an appropriate
remedy. Any remedy suggested by P would require the court to determine the substance of the agreement.

Chapter 5: Mistake, Misrepresentation, Impossibility and Frustration


MISTAKE
*Sherwood v. Walker. (landmark case on mutual mistake). Arose out of a contract for the sale of a cow. Seller gets rescission as
both parties were unaware that price agreed upon for a barren cow was actually for a breedable and pregnant cow. If the cow was
contracted to be sold, upon the understanding of both parties that she was barren, and useless for the purpose of breeding, and that in
fact she was not barren, but capable of breeding, then the seller had the right to rescind. Mistake as to quality of subject matter may
be grounds for rescission. Mutual bilateral mistake of material fact which affects substance of consideration is a basis for rescission.
 Three requirements from Restatement 152, 154 to establish mutual mistake:
(1) The mistake goes to a basic assumption on which the contract was made;
(2) The mistake has a material effect on the agreed exchange of performances (such that the resulting
imbalance is so severe that one party cannot be fairly held to carry it out); and
(3) The mistake is not one of which that party bears the risk. ((1) The most obvious situation is when
the agreement itself provides that a party bears the risk. (2) A party bears the risk of a mistake when
they make a contract with only limited knowledge of the facts to which the mistake relates, aka
“conscious ignorance. (Wood) (3) The third way a party bears the risk of a mistake occurs when the
court allocates the risk to him on the ground that it is reasonable in the circumstances to do so.)

Rest. 152-169 Deals with Mistake law


Courts almost never grant relief (Rest. 153 unilateral mistake) in these cases. Check out clerical error in Farnsworth. Under Rest. 152
with a true bilateral mistake, then we may be able to grant relief. We might allow recovery when the court sees more than mistake
alone, it we can attach it to something else…
(1) mistake caused by or related to…impossibility in performance (coronation case, violin case Smith),
(2) mistake caused by positive fraud (notes to topaz case),
(3) mistake caused by innocent misrepresentation (Summit Timber Co. case),
(4) mistake tied to an implied warranty for fitness for a general purpose (UCC 2-314, 2-315—land for residential use case),
(5) information problems of non-disclosure (tobacco case),
(6) active fraud related to silence leading to an error in information.

Note: no meeting of the minds if we have mutual or bilateral mistake. Even if only one partie makes a mistake we
still don’t have a meeting of the minds. Unilateral mistake we don’t allow rescission as we do with bilateral because it
is a matter of how we would allocate the risk. Let the mistaken party bear or internalize the cost. Is that what we have
in Sherwood v. Walker?

Lenawee County Board of Health v. Messerly. Buyer agreed to purchase an apartment house. The contract provided that “purchaser
examined this property and agrees to accept same in its present condition.” After execution of the contract, the Board of Health
obtained an injunction forbidding occupancy of the premises. Court held no rescission for the Buyer. “If the as-is clause is to have
any meaning at all, it must be interpreted to refer to those defects which were unknown at the time the contract was executed. Thus,
the parties themselves assigned the risk of loss to the Buyer.

West Coast Airlines. West Coast purchased two engines worth $3,500 each and sealed them in large metal storage containers. The
two sealed cans were inadvertently sold as junk at two cents per pound. West Coast filed action in replevin seeking return of the
engines. Held for West Coast. “The law of mutual mistake is not applicable. The parties never made a contract for the sale of
engines.” The cans must be distinguished from their contents. There was no meeting of the minds, no contract and thus no sale of the
engines. Title to the two engines remained in West Coast.

*Wood v. Boynton. (No Mutual mistake; Did not meet 3rd requirement) Plaintiff sold a rock for $1 to a jeweler. Neither party knew
what it was, but both believed it was a Topaz. It was actually an uncut diamond worth $700. The court denies relief, although it
seems that according to Rest. 2nd, the mistake involved a basic assumption on which the contract was made and had a material effect
on the agreed exchange of performances. How is this to be reconciled with Sherwood v. Walker? Courts have often sought to
reconcile cases like these by explaining that avoidance of the contract is allowed only for mistakes that go to the “identity” or
“existence” of the subject matter, not for those that go merely to its “attributes,” “quality,” or “value.” The Restatement section 154
reconciles these cases by its third requirement: the party adversely affected must not bear the risk of the mistake. The seller of the
stone bore the risk of the mistake while the seller of the cow did not.
 This case agrees with the Sherwood dissent. Difference in quality or attributes not enough to rescind. Also, this can be
reconciled with Sherwood in that in this case the seller had limited knowledge and knew that she had limited knowledge but
treated it as sufficient. The seller therefore carried the risk of mistake.
 The more dominant rule is the dissent to the Sherwood case.
 You need a case where the thing sold or contracted for is different from the thing delivered. The substance of the
consideration is adversely affected or different. Rest. 152 idea. How argue this in this case? They pointed to a specific stone
and delivered it. No mistake as to identity of consideration, just ignorance as to the value. They assume the risk.
 This is a cosean settlement for what is otherwise uncertain in life.
 Who is to assume the risk of the value of the stone? Rest. 79. Almost universally the courts will not intervene and
individuals assume the risk of their business judgment as to the value. The parties could each have had the rock appraised.
Rest. 154(b) each side looks out for his own self-interest.
 Could you argue the one party relied upon the expert jeweler and that he misled the layman jeweler. In a strict view, you’d
have to prove the five common law elements of fraud. You must prove you justifiably relied. What might get in the way of
that? Rest. 163—duty to investigate.
 Don’t assume intent by the jeweler to mislead. One of Stone’s five rules.

Pilot Life Ins. Co. v. Cudd. Insurance policy on Cudd. He was in the Navy, went overseas, and Cudd’s wife was issued a certificate
of presumptive death. Insurance co pays proceeds and then Mr. Cudd appears later as POW and is present at trial. Wife loses.
Insurance Co. wins. Compare this case to other “death case.”

Metropolitan Life Ins. Co. v. Kase. Kase suffered a severe eye injury. A group disability policy provided for a lump sum payment if
an employee suffered “total and irrevocable loss of sight in one eye.” Policy paid out. Three years later, sight returned to Kase’s eye.
Metropolitan learned of this and demanded its payment back. Held: Kase did not have to pay.
 If you find out later an injury is more extensive, should you have to live with signing the release and signing away your rights
—in some cases no. The plaintiff is getting an early settlement for signing a release instead of taking the risk of a lesser
settlement or no settlement. In this case, does the plaintiff have his way both ways—he gets an early settlement and then
doesn’t bear the risk. This is not a social insurance, all-risk insurance policy.

Releases of Personal Injury Claims


 Where the plaintiff had been under a serious misapprehension when he singed the release as to the nature or extent of his
injuries, there is naturally pressure on a court simply to ignore the drafting and to set aside the release on the ground of
“mutual mistake.”
 Whether the parties intended to cover an unknown injury cannot always be determined exclusively by reference to the
language of the release itself. It may require consideration of the conduct of the parties and the information available to them
at the time of signing.
 The argument is that the court “renders useless most releases.” If the release here can be avoided, then no release buys peace
until the statute of limitations has run.

Griffith v. Brymer. (Coronation case) The Coronation of Edward VII did not happen on the planned date due to a sudden operation.
Neither the innkeeper nor the renter was aware of this fact when they entered into an agreement. Both parties were under a
misconception with regard to the existing state of facts about which they were contracting, as such the renter was entitled to the return
of his money. Implied term supplied by the court that excuses performance. Which terms do you want read into the contract? The
express or implied terms (by the court). The court held the room contract was void b/c of mutual mistake. Court held performance
was impossible due to the mistake with regard to the existing state of facts about which they were contracting. Externalizes cost to the
innkeeper.
 Where both parties know a unique purpose for contract, like the coronation, there is a mistake when the coronation does not
occur.
 Are we merely saying we see this as an all-risk insurance policy contract? Whether or not the coronation occurs, the owner
assumes the risk for guaranteeing rooms pending the coronation actually happening.
 We might have mistake b/c of impossibility.

Smith v. Zimbalist. Plaintiff was collector of rare violins. Plaintiff agreed to sell two violins, he believed to be of great quality and
value for $8,000. $2,000 up front and then $6,000 later. At the time of sale, each party believed the violins were genuine, but there
was a preponderance of the evidence to the effect that both were imitations not worth more than $300. Held: Judgment for Buyer.
“The parties to the proposed contract are not bound where it appears that in its essence each of them is honestly mistaken or in error
with reference to the identify of the subject-matter of such contract.”
 Is warranty a better way to handle these cases? UCC 2-313. Like the Wood case all these parties fail to look out for their
own economic self-interest by not taking the violins/rock to be appraised. Rest. 169—relying on seller as expert, you could
argue. Rest. 163—duty to investigate to look after one’s own self-interest. Only in the rarest cases will the reliance doctrine
be allowed.
 We might have mistake tied to warranty.

Summit Timber Co. v. United States. Forest Service offered government owned timber for sale but marked false blaze lines so that a
certain portion of plaintiff’s own timber was included. Plaintiff relied on this boundary and paid the Forest Service for some of
plaintiff’s own timber. Court holds both parties assume the risk but the court grants relief to the plaintiff. Two part representation
language—(1) innocent material misrepresentation of what was to be cut occurred, and (2) the plaintiff reasonably relied on the govt’s
measurements. Problem with second part of the test—do you have much sympathy of someone who relied on gov’t measurements.
The party had the duty to investigate under Rest. 163.
Hinson v. Jefferson. Implied warranty, UCC 2-314 or 2-315. Deed restriction say residential use only. Need sewage system but
can’t put it in b/c of severe drainage problems. Court merges mistake and implied warranty. The legal rationale is that the seller
warranted through the deed that the property could be put to residential use. The court granted relief on the ground that both parties
had been mistaken as to a fact “which was of the essence of the agreement.” Implied warranty of particular purpose, UCC 2-315
(that’s for goods, this is land—but dealing with ideas). Court says the condition was unknown and not reasonably discoverable by the
buyer. But what incentive do you have when you buy land? To investigate. Rest. 163. The buyer wants to play the victim and wants
to be rewarded for his own sloppiness. Is it impossible to build the sewage system? No, just expensive. So you could argue frustration
of performance. Buyer wants to be immune from the risks of the marketplace. Seller should put clause in that demands the seller
bears the burden to check public records and assumes that responsibility.

Mistake + Relief= when? Rarely! These cases are exceptions to the general rule!
Economists v. Politicians

Laidlaw v. Organ. Mistake related to failure to disclose. Seller asked buyer if he knew of any facts that would affect the price of
tobacco—any facts that would make the price of tobacco increase (due to the ending of the war). Buyer was silent and purchased at a
lower price than he would have had he disclosed. When such a question is asked, silence was equivalent to a false answer, and as
much calculated to deceive as the communication of the most fabulous language. However, the Court held the Buyer was not bound
to communicate the information. Both parties have equal access to the information. Is this another exception to internalizing the costs
of mistake? Seller made a “unilateral mistake” by not doing his own research. Rest. 153—rarely we grant relief for unilateral
mistake, we internalize costs of mistake generally. If the seller could prove active fraud on the part of the buyer, he may be able to
recover—look at Farnsworth on fraud—fraud in inducement and execution. Silence might be active fraud—buyer just can’t do
anything to impose active fraud. Rest. 161. Does the buyer have a duty to disclose? The status quo is that a party has no general duty
to disclose information—even if that party knows information to the exclusion of the other party. How could you argue the buyer
imposed misinformation on the seller? His silence might have been interpreted into an affirmative negative answer. When the seller
asked for info about the value of the tobacco, there made a duty for the buyer to respond accurately. However, if we continue down
this analysis, it destroys the Rest. 163 duty to investigate. It would be a free ride for the seller. The information is equally available to
the buyer and the seller. So, why is it right to make the one with the information have a duty to disclose? Both sides are required to
due diligence. Seller shouldn’t whine about how low his goods are selling for b/c he sets the price. No incentive to be the “brother’s
keeper.” Buyer wants the best deal. We’ve got contradictory pulls. The parties have property rights in their information. Usually,
you sell property rights. But if the court holds it is necessary to disclose, then what is the court doing to his property rights? Isn’t that
a gov’t taking of private property and redistributing it to the other side. Hypothetical contract—what would the parties have done ex
ante had they known the true price of the tobacco and that the war had ended?

Kronman Note. Start ex ante with neither party having information. Then we ask who is in the better position to discover and
disclose. These are important! Three rules on discovery: (1) if it’s equally difficult to discover, no duty to disclose (this rule covers
most cases, not an emphasis on who has the information). Rest. 163, (2) if the seller ex ante can more efficiently discover at lower
cost, then he has the responsibility to disclose, and (3) if buyer ex ante can more efficiently discover, at a lower cost, he has the
responsibility to disclose. The emphasis is on the ability to discover, not on who actually has the information. If we pick up
information in a low cost fashion, the court may imply a duty to disclose. However, if we invest tons of money into researching a
certain thing or invest lots of resources, then probability courts will not impose duty to disclose. On exam, apply these three rules and
argue them. Why do we want disclosure if it can be gained at low cost—the goal is a meeting of the minds.

This is how people mess this up: The analysis doesn’t stem from the position of who has the information ex post, doesn’t stem from
the position of who is in the business—it stems from looking at things ex ante—in the beginning and who has low/high
information/transaction costs.

Feist v. Roesler. Defendant desired to sell land provided there was no immediate development for oil in the vicinity. Plaintiff learned
that the oil company had placed a drilling rig on an adjoining tract of land and he then offered to buy defendant’s land. Defendant
agreed to sell but refused to carry out the contract when he later learned of the oil development. Judgment for defendant affirmed
when plaintiff sued for damages. Plaintiff “had a duty to speak under the circumstances and concealed this fact from defendant.”

Brown v. County of Genesee. County hired plaintiff at the C-level. County knew that plaintiff was under the impression that the C
step was the highest, but felt no obligation to tell them of their mistake. Held for defendant. Plaintiff’s mistake resulted from failing
to examine public records which were available to all; since there was no misrepresentation or fraud, the defendant had no duty to
advise plaintiff of any factual error.

Helene Curtis Industries Case. Rest. 161(d) Something new added here. If the parties have a relationship of trust or confidence, or a
fiduciary relationship, there is a massive duty to disclose. As a general rule, contract is a step before fiduciary duty, generally. This is
an exception. Gov’t had special needs, an extremely close relationship, had sponsored the research and had reason to know the other
party did not possess the same info.
First Baptist Church of Moultrie. (Allow rescission for unilateral mistake for clerical error—when one party knows or should know
of the other party’s honest clerical error, Rest. 153, 160 approach. Courts are skeptical in this area b/c under Rest. 163 there is a very
strong duty of investigation to be responsible for the accuracy of one’s bid). Argued he revoked his offer before acceptance, before we
get to contract. Revocation wiping out the offer before we get to Acceptance. But there is a past statute that says bidders generally
can’t revoke. The legal vehicle here is rescission based upon mistake due to clerical error—unilateral mistake due to error. One
revokes offers but one rescinds contracts for mistake. Generally, when a unilateral mistake is made, rescission is not allowed. Rest.
153. Unless, there is fraud or misrepresentation, or omission when there is a duty to disclose, or as here—the clerical error exception.
Three part analysis to determine whether court will grant rescission for clerical error: (1) when the other party (church) can be
returned to the status quo, (2) where one party knows or has reason to know of the other party’s clerical error, and (3) we allow
rescission to prevent unconscionable taking advantage of the other party. The court holds it is unconscionable to hold the construction
company to their bid. But you could argue, tough luck. He was in a better position to know what his services would cost and should
use due diligence to re-check for clerical mistakes. Could this be negligence and not just clerical error? Maybe it’s unconscionable to
not bind the construction company. Use hypothetical contract analysis. What would they have sought as the figure if parties ex ante
knew of the clerical error? Would they have agreed to that figure? No. On exam, argue mere mechanical error and argue, in fact, we
have an error of judgment.

Goal=Allocation of Risk
Non-economic criteria (Wolftrap) v. Economic Criteria (Posner, NIPSCO)

General rule is that we are not going to rescind for mistake. Rest. 153. But there are many exceptions.

Laidlaw test: what is imposing information? Two part test: (1) parties, if they are actively negotiating, (2) a failure to disclose when
there is a duty to disclose. Rest. 161 approach. When is there a duty to disclose. Use Kronman rules. It doesn’t have to do with who
has the information, but depends on the ease of the initial discovery of the information. No duty to disclose information if a party has
high search costs for it, but there is a duty to disclose if one casually picks up the information, low search costs.

Reed’s Photo Mart. Two part test the grieved party must reach: (1) aggreived party must prove the error that the other party knew or
should have known of the mistake, and (2) in order to get relief, the mistaken party must put the innocent party back in the status quo.
This is difficult in this case.

Upton Fire District. The wrong fire department comes to put out the fire. Powell did not live in the Upton Fire Dept District, but
called them, and was forced to pay. Follow rule of no relief for mistake of one’s agents. Did the D have the intent to contract for fire
protection? Did he really care who he got it from? Implied in law contract situation, like in medical services situations, we just want
the services rendered—there is an emergency nature. Must analyze this in terms of intent.

Taylor v. Caldwell. (landmark case for impossibility) (Court uses economic criteria of lowest cost provider). D contracted to use a
music hall and it burned down. Plaintiffs brought suit for breach of contract, seeking compensation for advertising. Court held for D.
Both parties “must have contemplated the continuing existence of the music hall as foundation for the contract.” The Music Hall
having ceased to exist, without fault of either party, both parties are excused. P claims impossibility of performance for his obligation
to provide the building. A basic rule: impossibility excuses performance only when D claims it cannot be directly performed as
contemplated. General status quo is NOT to use impossibility of performance to allow rescission. Rule: Contracting parties must
perform the black and white of the contract or pay the damages. The test: if they did not know from the beginning and there is
no fault, then we excuse the parties. When an implied term or condition never occurs or ceases to exist, performance may be
excused under the impossibility doctrine.
 Could argue P should be obligated: he is in the business to provide concert area and should have insurance to cover burned
building. He could be forced to self-insure and pay the damages, if no insurance or find an alternative sight.

Impossibility: the court gap fills to allow excuse on the grounds of impossibility by saying it is an “implied condition” of the duty
that performance remain possible.
Three areas of impossibility of performance where allowed for rescission. (These are also basic assumptions upon which the
contract relies.):
(1) contracts for personal services, but death or illness intervenes; If a particular persons’ existence is
necessary for the performance of a duty and performance is prevented by that person’s death or
disability, the duty is discharged.
(2) contracts where intervening legislation makes performance unlawful; if supervening governmental
action prevents a party’s performance by prohibiting it or imposing requirements that make it
impossible, that party is excused.
(3) If existence of a particular thing is necessary for a party’s performance, the party is excused if the
destruction or deterioration of that thing prevents performance. (This rule was confirmed in Taylor).
 Distinguish between repair cases, in which a contractor claims to be excused from completing
repairs on a building that has been destroyed—the existence of the building is necessary for
performance and destruction of it w/o fault will excuse performance of the contract.
Contractors who contract to build an entire building are still held to do so, even though the
nearly completed structure has been destroyed.
 If a farmer claims to be excused from delivering a stated quantity of a crop b/c the farmer’s
crop has failed, the farmer is generally held liable to deliver b/c he is expected to procure the
crop elsewhere—unless there is specific stated the crop would come from his own farm land
which was destroyed, then he will be excused.

Construction and ¾ the way through, the building burns. Construction will have to rebuild or pay damages. No relief. How do you
resolve this in light of the Taylor case? Confusing unless you look at it as a risk allocation question. Who assumes the risk of non-
performance due to unforeseen hardship? Approach it as contract as insurance. Question is one of ex ante—who has better access to
information? If we have a loss, who is in the best position to insure the loss? Whoever has the lowest information costs, and look at
common trade usage. Why is the Taylor case different? Lower cost on the lessee.

Repair Cases under Impossibility.


Wolftrap. Outdoor amphitheater for opera. Power outage at the concert put on by Wolftrap and Wolftrap refuses to pay opera
company. Wolftrap wins under impracticability of performance. Aren’t power outages foreseeable? Generally, impossibility of
performance is granted only for unforeseeable events. The low cost way around this is to put a clause in the contract releasing liability
for power outage. Ex ante there is lower information costs for Wolftrap, they know their own facilities and knows the electric system.
The lower cost provider is Wolftrap. Opera company is made up of performers who travel everywhere and perform. Who should bear
the risk? Two ways for courts to allocate the risk: (1) use economic criteria view (Posner view—let party with lower cost bear the
burden of risk of loss); (2) use non-economic criteria (Wolftrap). The incentive for both parties is to put in detailed clauses. This case
uses non-economic criteria of “fair, reasonable, and just” and other ambiguous language like impracticability and frustration.

Insurance contract—simple rules for allocating risks:


(1) Whose going to decide who bears the risk? Let the parties decide per cosean contract terms. Put in the black and white of the
contract to determine who will bear the risk.

Transatlantic Shipping case. Shipping company was forced to go around the Suez Canal and the cost to make the trip was greater.
Shipping co. sues for the difference. Court reasoned that carriage through the Suez Canal and carriage around the Cape of Good Hope
were alternative ways of performing the contract. No impracticability of performance. Court unpersuaded by argument that shipping
company had to take on greater financial expense. Is this impossibility to deliver or just more expensive to deliver? On this slippery
slope, upon what minor convenience would the courts allow a plaintiff to recover? Stone does not like courts that allow recovery for
things that do NOT render impossibility of performance.

NIPSCO v. Carbon Coal Co. (Posner case). (Court uses economic criteria of lower cost provider.) NIPSCO contracts to buy coal
from coal company and the Indiana Public Service Commission (PSC), which sets rates and prices, granted requested increase in
NIPSCO’s rates but mandated to make a good faith effort to find cheaper electricity from other companies rather than to internally
generate the electricity. It makes the fixed-rate contract with Carbon Coal unnecessary and unneeded. As to impossibility, you have to
have a legal vehicle—NIPSCO argued the order of the PSC prevented internal using of coal and should have been rescinded under the
force majeure clause (a third party intervenes and prevails, here the PSC). Court holds the force majeure clause was not intended to
buffer normal risks of contract. The clause was not triggered by the order. Posner does not excuse defendant on impossibility or
impracticability grounds. As in the Wolf Trap case, one court will decide one thing if you use non-economic criteria and the next
court will decide the opposite. No stability in the law. Does it prevent NIPSCO from using the coal? No, just makes it unprofitable.
Prevents NIPSCO from shifting its poor forecasting on its customers. The PSC will eventually allow NIPSCO to raise the prices to
their customers to accommodate for the non-used coal. Therefore, either way the consumers will probably pay—either up front with
higher prices, or after litigation with higher prices. Posner says only TRUE impossibility of performance should be excused under
impossibility of performance—something clearly beyond the control of NIPSCO. Simple Rules for allocation of risk: the black
and white terms of the contract. Apply Taylor v. Caldwell—do we internalize costs to power co or to coal co? Who ex ante had
lower information costs or was in the best position to assess the risk? The risk of the future PSC to change the rules. NIPSCO
was in the better position as Posner notes b/c they deal with the PSC daily. NIPSCO has lower information costs.

Krell v. Henry. (Coronation case; Frustration of Purpose doctrine) Henry put $25 down to rent flat for coronation and when it was
postponed, he refused to pay the remaining $50. The court held for Henry b/c “the coronation procession was the foundation of this
contract and the object of the contract was frustrated by the non-happening of the coronation.”

*ALCOA v. Essex. (Mutual Mistake) ALCOA to sell to Essex long-term supply of aluminum that Essex would use in manufacturing.
Economic formula provided by Alan Greenspan. Economic forecasting didn’t work. Ended with a windfall for Essex. ALCOA stood
to lose 60 million dollars due to inflation and Greenspan used historical percentages for inflation and Greenspan missed his mark here.
ALCOA wants out but need a legal remedy—it doesn’t satisfy that they’re stupid. ALCOA sought relief for mutual mistake. The
judge found mistake of fact and provided relief for ALCOA. “The long-term contract is at stake here. If the law refused an
appropriate remedy when a prudently drafted long term contract goes badly awry…prudent business people would avoid using this
sensible business tool.” Rest. 261 and 265. Could we argue firms in ALCOA would not assume the risk of long-term contracts if the
courts did not let them out as here? They do engage in these contracts, daily, w/o the courts help but put clauses in the contract to deal
with this type of thing. Could argue ALCOA assumed the risk here and should be denied relief. Do we internalize the cost or
externalize it to the other side? We could argue a reliance view on behalf of Essex. What would have happened had ALCOA received
the windfall (the opposite)? Does ALCOA want it both way—wants contract when its in their favor and not when its not. Argue to let
ALCOA out—query can we say both sides had high information costs here and both were participants in the economic forecasting.
Neither party was in a position to know all the variables and the changing of them in the U.S. economy. Unforeseeable loss—as in pg.
647. Opposite argument—it wasn’t shared, it was ALCOA who hired Greenspan.
 Like Sherwood v. Walker, didn’t know about pregnancy in the cow case. The mistake is on a present fact—the capability of
pregnancy. But ALCOA’s mistake is about the future data subject to risks of variable inflation. And under common law, is
there relief or reformation for mistake of future events? No.

Carroll v. Bowersock. Before building is built it is destroyed by fire. Excuse builder’s performance. Any remedy if we have
performance by one side? General rule in impossibility for performance: Beyond rescission, the courts will leave the parties
where they find them. Exception: Rest. 272. Under all three doctrines, if there has been partial performance, dollar damages are
possible if we prove work was performed and the other side benefits. Courts will sometimes look to see whether there is any—real,
practical utility within the part performance. Not just steel poles sticking out of the ground.

Chapter 7: Policing the Bargaining Process


No mutual assent b/c someone has been misled when you sell me a painting I think has been painted by Rembrandt, but has in fact
been painted by Mr. Robinson. Fraud-one of big eight common law policemen. (1) we get a false material representation or untruth
(could be nondisclosure), (2) the misrepresentation must be of a past or existing fact, (3) we need scienter, a knowing intent to defraud
—big element to distinguish fraud from plain old misrepresentation, and (4) we must have a reasonable or justifiable reliance by the
victim. Rest. 163 acts as limitation on finding cases here, (5) must be injury to plaintiff caused by these first four elements. Causation
is important. It is going to be rare that you find fraud in the law. It is difficult to prove.

Hahn v. Ford Motor case. Working from freedom of contract with contradictory pulls. Hahn purchased a Ford LTD. If we throw out
clauses as being too complex we run down the road to unconscionability and into ambiguity. Writings have to be continuous—under
2-316(2). 1-201(10) for definition. We want to avoid surprise. Wouldn’t the simplest rule be to tell parties to read their entire
contract? If not, you can litigate like Hahn. Is this conspicuous when we put the warranty limitation in the glove box? The court has
no problem saying yes. Ford only limited liability not wipe out liability. Therefore, it was okay. Who pays for the regulations when
companies have to accommodate for the lemon laws? All buyers through a tack on of price. With the increase of the price of each car,
it becomes a regulatory tax on each customer. Those who want freedom of contract are paying for those who don’t want freedom of
contract (want regulation). This is coasean contracting.

A & M Produce case. Machine to sort tomatoes and it doesn’t work properly. Good 2-315 implied warranty for a particular purpose.
D argues there is a written exclusion of warranty and buyer takes “as is.” Does the court allow this commercial goods disclaimer? No.
This case pulls opposite the Hahn case and says it is commercially unconscionable. FMC sometimes negotiates individual contracts.
This plaintiff just failed to look after his own self interest. Did the salesmen have authority to negotiate? No, so could argue it is an
adhesion contract, take it or leave it contract. P should have gone higher up to negotiate with someone who could. Could argue there
is almost never an adhesion contract in this world of contract? Go to a competitor and ask for a warranty of the type you want. If they
give you something, go back to FMC and tell them what you received from their competitor, and possibly you’ll get an even better
deal.

I. Procedural Unconscionability
A. Look for Oppression
1. No real negotiation
2. Or an absence of meaningful choice
B. Surprise (Gomer?)—Of all people who should read the black and white of contract, it is business people—they should be
held accountable. If not them, who? They have available legal advice.
II. Substantive Unconscionability=That means it is commercially unreasonable.
7 part approach put on exam.

Review 2-312 through 2-318 (good material for exam—about as black letter law as you can get), and 2-719.
2-719(3) is important for this semester.

Coase rules—warranties are like price in that they must be determined by the market. We want a compromise in the allocation of risk.
That will be whatever bargain the parties bring it to.

READ THE HANDOUT FOR A QUESTION ON THE EXAM: THE HANDOUT SHOULD HELP. (2PAGE)

Product Liability
Contract and Not Tort.
2-316, 2-719

Argue you don’t want all the warranties and want lower price. Can we have it both ways at once? Contract and tort and still have
stability and certainty? Or does it go the other way to give us death of contract and death of tort?

East River Steamship. This stems from contract. How would the damages be determined in contract? Special consequential loss
damages are only given if D is aware of them. (Hadley v. baxendale) 2-315 warranty for a particular purpose, and you have to know
about the particular purpose. But under tort, it is different. At the extreme, it is a follow the flow approach. We say product is
defective, then there is injury and recovery. Does it border on imperfection liability? In an imperfect world, you can have perfection.
Therefore, you are always liable. Product liability arises out of strict liability—historically, strict liability results from dangerous
activity not things like turbines that are defective.

402(a) Do we have a defective product?


Several ways to handle it:
 Tort/Contract as insurance. Absolute insurance is a factual impossibility in an imperfect world.
 Hand Formula—risk/utility tradeoff. For each 1.00 of additional cost do we get 1.01 or more of safety? IF we do, we are
negligent if we don’t pay the money for the benefit. If we get less, then we are not negligent. Learned Hand was the ultimate
economist. This is just a marginal cost, marginal benefit approach.
 Mouse in a coke bottle. No one claims fault, of course. (1) A single product, (2) a rare occurrence, (3) a high prohibitive cost
to the manufacturer to achieve safety, (4) it is only a minor injury, (5) nothing consumer can do to provide for safety, (6) there
would only be a slight increase in cost for coke if we found a way to deal with this to pay someone. Find liability under
product liability. Yes.
 What about other cases with more occurrences and catastrophic injuries? Whooping cough example. You will bankrupt the
defendants. There will be ways we can use cosean contract here. We attach a price to the goods as a formal insurance—
contract as insurance—add money that goes into a pool and then we have “no fault” liability. Contract not tort.
 What about smoking? Voluntary assumption of risk. Too many people affected to add on money to each pack of cigarettes, to
make a pool for liability.
 If your goal is to maximize societal welfare, do you want to use the emotional approach or economic approach (which takes
into account real costs and real benefits)?
 Prices convey information. One would expect less safety and comfort if they pay 10,000 for a Ford Focus instead of
$80,000 for a BMW. You get what you pay for—cosean terms.
 Rest. 402(A)
 If products are truly too dangerous to buy, then it is not the courts place to get those products off the market. But the market
should take care of the product itself, people will stop buying.

PRODUCT LIABILTY: 402(a)


If our goal is workable product liability law, there are two contradictory pulls: either product liability as no-fault absolute insurance
(emotional) or product liability as an allocation of risk (scientific method which is a Hand formula approach) (Rest. 402(a) principles).

All products are defective in this imperfect world; therefore, it would be all-risk insurance. It is a world of scarce resources and
therefore we cannot have all-risk insurance, defendants would go out of business.

Hand formula—if ex ante, the defendant had invested a dollar more in (whatever—some safety device) would we get $1.01 more in
safety? If yes, D is liable. If no, D is not liable for negligence.

Service liability and exculpatory clauses: Spa Petite case. Services liability. P suffers personal injury. Not product loss. Contract
excuses spa and its employees from negligence. Allocating risks by contract. P assumes the risk. SC says exculpatory clause can be
valid; although service exculpatory clauses are not favored. When are these valid? Two-part test: (1) exculpatory clause must be
unambiguous, and (2) must be limited to freeing D from negligence. Not okay to block based upon willful acts of negligence. Rest.
178 public policy—must not violate public policy. Two questions re: public policy: Is there disparity of bargaining power? Were the
services general public services vs. essential public services? Could argue these exculpatory clauses are invalid—could argue these
are essential b/c they are essential services dealing with public health. 3 part test of adhesion: (1) since there is no great disparity of
bargaining power, (2) no problem with their being no opportunity for negotiation, and (3) they can’t argue they can’t get services
elsewhere.

Elements for an adhesion contract:


1. Need disparity of bargaining power
2. No opportunity for negotiation
3. Can’t get services elsewhere
Anchorage v. Locker. There are competing books for the Yellow Pages—there are other options, including the Internet. If there is a
monopoly on the YP then it can be viewed as having no bargaining power. Has the advancement of science, being able to produce
other books and use the internet, deregulated this area?

Exorbitant Price. 2-302 Unconscionability. Kugler v. Romain. Classic consumer unconscionability case. Read and outline carefully
on your own. Unconscionable as exorbitant price. The judge goes so far to call this a fraud. Stone says unconscionability is not fraud.
He does not like it that the judge calls this fraud. Does not meet the five elements of fraud. Court generally does not look at the
adequacy of consideration. Courts should not substitute their judgment. What is response to unequal bargaining power? Leave the
risk of unequal bargaining abilities to the parties. We never have utopian bargaining power in any contract. There is never equal
bargaining power.

Read in Farnsworth on Illegal contracts.


Some Illegal contracts:
(1) Agreement to commit crime or tort
(2) Restraint of trade by interfering with a valid contract
(1) restraint of trade on sale of business
(2) termination of employment
(3) Usory contracts
(4) Services rendered without a license when a statute requires a license. Two types of statutes (Rest. 181). Regulatory licenses
violated—one that seeks to protect members of public from dishonest or unskilled persons. When violated, contract is unenforceable
by either party. The second statute is a revenue raising statute—the purpose is to raise money for the gov’t. Does not render the
contract illegal. Farnsworth—other illegal contracts are covered including these.

181, 187
1. Is restrained provision ancillary? Does it protect legitimate interest of employer or seller?
2. Is it reasonable as to length of time?
3. Is it reasonable as to area or space?

Owens v. Owens. (illegal) Possibly involves breach of a fiduciary duty. Bro contracts with Bro for his half of estate. Bro pays 1/5 of
purchase price. The parties are in a position of extreme trust. As trustee of the estate, there is a fiduciary duty. The transaction is
prima facie presumed invalid, and D has the burden to show the transaction was not illegal. P merely made a dumb decision and did
not look after his own economic self-interest. 2-302 does not even allow relief for mere stupidity and laziness. On other side, we
could argue D had first-hand access to knowledge of info about the estate to which P only has secondary knowledge. D had lower
information costs and had duty to share the information with P--heightened under his fiduciary duty.

Bal-Fel, Inc. v. Boyd. Dancing Gone Wild. Is there any respect for the concept of the rule of law? No certainty in the law. Any failed
expectation subject to litigation in the United States—we can’t do that, scarce resources. Is this the final contort—services liability as
opposed to product liability? Is this a coercive D or a weak P? Is the court hiding behind the language of definition of fraud? What
are the consequences and incentives created by this ruling? We have public ordering (as opposed to private) in this case/emotional. If
contracts are not upheld, there is a less incentive to contract. We get less trade and less goods and services at higher costs as a result.
If contracts are upheld, then you get more activity at a lower cost. Thousands of dollars of dance lessons. She bought stock in the
dance company. What is the legal issue? Possible fraud. Near bear fraud. Fraud in the inducement? Court holds yes. Fraudulent
representations that induce action render a contract void. It destroys any chance for meeting of the minds to have a voluntary
exchange of property rights. Future statements are protected under Rest. 168 and all these statements that she will go on to be a great
dancer and should buy stock that it will be good for her. In order to find fraud you have look at past statements. Breach of
confidential relationship. Could argue Y and argue N. Argue just a business relationship. Thousands of dollars. Not an emotional
thing. Go through each of the elements of fraud and argue Y or N for each. She received benefits: companionship, dance lessons.
She gets to keep the benefits w/o paying for them b/c of the court’s decision. There is no free lunch. If she really was hurt can we
give her relief here w/o bastardizing K? Incapacity? Incapable of comprehending the nature of the business at hand. Doubt it here.
Undue influence. Farnsworth on Incapacity. Stone says this case has least analysis of all those we’ve looked at this year. No analysis
of five elements of fraud. There is no law in this case. None of the five elements of fraud.

Graph on board. If the law’s uncertainty adds to the risk of uncertainty, there will be fewer goods produced and have to spread cost
over fewer units of production (40 mph maybe/uncertainty/case by case). Higher price. With clear rules of law, people know where
they stand and will take more risks to buy goods and services. More goods will be sold at lower price. Who suffers the most? The
poorest among us—they have the fewest resources to buy.

519-551 Conditions in Farnsworth.


Assignment in Farnsworth 669-747.

Club Med (Fraud case) 5 common law elements of fraud—


In re Carter’s claim. Is this a condition precedent or an essential term? If essential term, breach of contract, $70,000 in damages.
Court holds condition precedent and an express condition precedent b/c listed under that section. Condition precedent—a trigger of
what the property is worth at time of sale. Other side—argue form over substance for essential element—even though it is placed in
that section, the terms view the appraisal as an essential term of the contract. Failure of condition—what remedy is available for
victim? Election to proceed or not to proceed on the contract. Sole remedy. P can end his obligation to perform but cannot get
damages for the breach. Condition is a prelude to performance—a planning device, no K in effect—that is why P cannot recover
damages.

In order to determine whether a condition or an essential term:


(1) Ask what does the K say? Look at language the parties use. Typical words for creation of condition: on
condition that, provided that, if.
(2) Rest. 227 Read all about Rest. 224-229 in Farnsworth. Look carefully.

Hudson v. Wakefield. Seller wants to treat returned check as a condition precedent. That way, he has right to get out of K. On failure
of condition, the P’s file suit for specific performance. They argue an essential term and they tried to cure. Trial court held earnest
money was put in an escrow account in event of breach—and held it was a condition precedent. Argue Not a prelude to K—but was
part of down payment of overall consideration/price of the K. Partial payment is an essential K term. Part-performance.

The goal is to preserve the contract, if they can. They want to uphold the voluntary agreement.

Haymore v. Levinson. What constitutes “satisfactory performance?” Subjective view or objective view. Objective view wins out.
The work must meet a standard reasonable under the circumstances with the accepted standards of the locality in the industry. Escrow
acct—an insurance policy, form of good faith to ensure K completion. Escrow accounts are usually Could argue that this should be
evaluated by a subjective standard—although it would be 40 mph maybe—but the person putting down the money should have the
right to obtain satisfactory performance as they view it. Why do courts favor objective standard? Beyond chaos, we want to prevent
monopoly whim of buyer causing forfeiture. 227 and 229. Are there any times a court would use the subjective standard? Ever let
recipient of performance be a monopolist and the sole judge to determine satisfactory performance. Allowed (1) when it is the true
intent of the K, (2) if it is a K for personal taste, fancy or sensibility. You have to be weary of making personal satisfaction the
standard—it would induce forfeiture, we don’t want forfeiture of K. Could there ever be a subjective standard? Yes, when (1) the K
terms clearly specify “personal satisfaction of the parties”, and (2) is there evidence in the K of true intent to have a personal taste,
fancy, or sensibility standard? This would apply in very specialized K’s—like a K for a portrait painting.

Posner point: pg. 798 Personal satisfaction, aesthetic value: “If it appeared from the language or the circumstances of the K that he
parties really intended General Motors to have the right to reject work for failure to satisfy the private aesthetic value of X, the
rejection would be proper even if unreasonable.” Bottom-line: if you want to use something other than an objective standard, then
specifically state so in the K. Show evidence of intent for personal taste to be the standard. Show clearly in the terms.

Burger King Corp. v. Family Dining. (Waiver) Exclusive territory franchise. Develop one restaurant each year for first ten years:
condition subsequent. D has franchise but can be terminated later if he doesn’t fulfill condition. Court argues no termination b/c BK
waived time schedule. How does court have authority to say BK waived time schedule? Argue N to waiver: argue it is divisible K,
although one writing it contains a series of performances. One restaurant per year. Thus, any late building of one restaurant is divisible
and exclusive of those that follow. Each year BK would argue they have the right to terminate. Economically makes sense b/c if you
miss one year, BK could waive, but then BK could decide as time moves on the excuses are too much and the franchisee is a free-
loader and no longer want to do business with this person. Court takes view if we have waiver for period of time—then condition
subsequent is waived too. Beware of public ordering v. private ordering here. Isn’t this in some ways a “satisfactory performance”
case? Court says no allowance of objective standard but court’s subjective standard will be applied here.

Clark v. West. If he drinks, publisher won’t pay. Court says it is condition precedent and it is waived. Heart of K is to publish the
book and waiving the drinking condition. We don’t block his $4 v. $2 recovery. Rest. 229. We want to prevent 229 forfeiture after
professor completed the writing. Court wants to prevent forfeiture b/c it wants to uphold the substance of the wealth produced in the
K. Other direction—strict adherence to conditions for performance. What if we don’t have strict adherence to essential terms or
conditions? The exceptions gobble up the rule. Extreme uncertainty and non-performance. 40 mph maybe realm.

Lardas v. Underwriters Insurance Co. (No waiver) Sloppy non-planners finish last. Insurance K. Time clause: if insured sues on K a
typical clause requires insured to sue on claim within 12 months of loss. A year and three weeks after fire, he sued, but only 9 months
after being informed of it. Maybe condition precedent, condition subsequent, or material term. Is this too little, too late? Court says
yes. Argue for P here—we don’t want it to defeat his claim b/c we don’t want forfeiture. Only three weeks late. Under 229, court
may ignore late filing to prevent forfeiture. But maybe not under last clause of 229, “unless occurrence is material part of agreed
exchange.” What is heart of K here? Policy holder pay premium and insurance co provide coverage. Focal point of filing is NOTICE.
The purpose of the one year limitation is merely administrative and not material. Could argue insurance co waived the time clause b/c
they negotiated for weeks in good faith. The insured tried to settle privately, in good faith 230, 205, before suing. 3 weeks delay is
not a material breach but a minor one. Argue this is material term—they put a no waiver clause and time clause. Insurance business is
really about investing money collected from policyholders. They want to file claims in a reasonable amt of time. Time is money,
especially in investing. Delay in settling claims messes up investment process. We don’t merely have one policy holder who would
delay beyond the deadline but many policyholders and the aggregate claims would amount to a substantial amount. In economic
terms, who should bear risk of delay? K terms put risk on insured here. Argue bad faith failure to settle the claim by the insurance
company. Argue no bad faith—not up to insurance co. to prove no right of other side to recover. You don’t have rights (as an insured)
unless you place express rights into the K. The insurance company has the right and the duty to be weary here. They want to protect
against fraudulent claims to protect the innocent from higher insurance premiums. Therefore, we put the burden on those seeking
money from the status quo and those who want to change the K. Therefore, is the delay in this process bad faith? No, just argue
merely their duty to check out claims thoroughly. We can’t afford high transaction costs to be competitive in world markets here. Idea
of wealth creators v. wealth takers.

Stewart v. Newberry. Constructive conditions for performance. Construction co. wants to be paid monthly. No terms in k stating
when to be paid. Do we imply a certain time frame for payments? Imply reasonable time for payments? We have law here. Two
implied conditions here: (1) implied condition that no payment is to be made til P proves substantial performance or full performance
of K work (it is centuries old K law—that is the basis for this implied condition), (2) once substantial performance occurs, it is implied
D has duty to pay for that work. The implied by law is well-set by common law by substantial/full performance. Not implied as used
by Traynor to re-write K’s but implied by precedent in common law. There is no ambiguity here.

Poke construction Co. Reciprocal performance case. Implied conditions here. D, subcontractor, to install highway guardrails for
general contractor. Behind schedule so subcontractor says steel prices on guardrails are only set for a limited time. General contractor
delayed on road construction and steel prices went up. Sub refuses to perform without increase of payment due to price increase.
General sues subcontractor for performance under K. Roadwork is sequential in nature. Implied condition precedent to guardrail
(sub) performing here…General must have road ready to put the guardrails in before sub can fulfill his duty. Only thing preventing
performance on time? No, also change in price of steel. Did K terms allocate price change to P construction co? the court found for
sub on his claim here. No terms in K placed duty on General for failure to have timely performance for having roads ready for
guardrails. When not ready, failure of condition by General here. Guardrail co. can then elect out and have damages. Second issue
here: General contractor should have realized price of steel fluctuates. Should the parties have known that delay always occurs in
construction cases.

Continental bank case. D are personally guaranteeing a borrower’s loan from Continental bank. Borrower is one day late in
payment. Bank refuses to accept payment and call in the loan as to its full amount. When is a little a lot? In banking, and insurance—
deadlines are to be enforced. Borrowers are broke so D’s are brought in to guarantee the loan. 237 and 240 and Farnsworth reading.
Material breach v. substantial performance distinction is important here. Implied concurrent reciprocal performance could argue is
satisfied here and performance has been substantial. We could have one day interest for late payment but not throw out whole K.
What if they say material breach by one day late payment? Bank can call in the loan. How do you K around? Put a late penalty on as
part of K term if one is one-day late on payment.

832 Walker Sign co v. Harrison. Warning of don’t be too quick to allege material breach. Failure to repair a roadside sign. Someone
splattered a tomato on the sign and rust and cobwebs were there. Argue express K language that repair is necessary. Say instructive
implied condition to repair sign as it was necessary. Drycleaner treats failure to repair as material breach (236) and repudiates the K.
Don’t be too quick to treat things as material breach instead of substantial performance. Court says delay is only a minor breach, not a
major one, so drycleaner is guilty of breach in counter claim. Failure to repair was minor b/c of test. Six part test of materiality on
pg. 635. K are to be performed and not killed. What is materiality? It is somewhat subjective. Don’t be so quick to sue. Re-negotiate
and settle. A settlement is a cosean K.

Assignment and Delegation—UCC 2-210 and read all Rest. In Farnsworth


Assignment—transfer of right under a K.
Delegation—transfer of duty under a K.
Note this: courts are very loose with the language here and courts tend to talk about both under heading of “assignment.”
No consideration required for valid assignment. Are assignments revocable? Gratuitious assignments are revocable but those for
consideration are not revocable. Revocation when consideration has been paid would result in breach.
Can partial assignments be made? Yes. When we talk of assignment, do we mean assignment of rights or delegation of duties. Often
it means both. Are there any exceptions to what we can assign? When can’t we assign—when we have a contractor says that he will
only assign rights but no duties, K’s involving personal services or credit or trust or confidence (ex: a joke writer), building or
construction co. (GR: a contractor can build according to a blueprint and delegate to others to fulfill duties), provisions of K or statute
will prohibit assignment or delegation. Trend is to look at disfavor at K provisions against assignment especially only where a right to
money is concerned. No economic utility in prohibiting assignment when only money is concerned. UCC 2-210(2). Assignments are
also prohibited when assignment would materially alter obligations of a party.

What effect does assignment have on the assignor? It generally extinguishes any rights of the assignor. Delegation is different, he is
not relieved of his or her duties. If assignee renigs on the K, then original assignor may be sued. Novation—only the assignee is
liable. Look at this in Farnsworth. This is an exception to the suing of the assignor. Novation—when one party is clearly released
and new party is substituted in his place. Consent problems in all this. Who must consent? Requires consent by all three parties.
NOTICE to obligor of the assignment. Could obligor end up paying twice? If obligor has notice of assignment from assignor to
assignee, he may not pay the assignor without a risk to pay a second time to the assignee. But what if he has NO notice and then he
pays the assignor? Can the assignee make him pay second time? No. Assignee can only recover from the assignee. What happens
when assignor makes assignment to more than one assignment of the same right? Two rules to be applied depending on which state
you are in. (1) Either the first assignee to give notice to original obligor prevails, or (2) the first to obtain assignment prevails.

Third-party beneficiaries
1. creditor
2. donee
3. incidental

Have standing to sue and recover: both creditors and donees. Rights as if they are a party. If incidental, they have no standing to sue
and recover. We analyze INTENT. What was the intent of the parties?

Incidental beneficiary: third party who might receive an unintended benefit if K is performed. If it is not performed, can this person
sue, have any rights? No.
302, 309, 311, 313

Exam: Assume 13 states follow BK and 13 states follow Lardas—you are in the 27th state, how do you decide what will happen?
224-229 Conditions.